Because of the trend of heftier lawsuits — and an industry push in general — more CEOs are investing in executive liability policies these days.
“The liability for CEOs, and directors and officers (D&O), is increasing all the time,” said James R. Cuprisin, CIC, ARP, project director for the Academy of Producer Insurance Studies in Austin. “The amount of liability seems to have significantly increased over the past decade as lawsuits are becoming more prevalent, and as the amount of losses from these lawsuits become higher. Coverage is becoming more important for these individuals. The courts seem to be saying that CEOs are responsible, or partly responsible, for a lot of things that, in the past, they were not.”
Massive judgments, the frequency of settlements and the rising cost of defense attorneys, in combination with the necessity to increase prices because of declining investment returns, are driving the growth of executive liability insurance, said Dick Clarke, CIC, CPCU, RPLU, MIRM, of Atlanta-based Palmer & Cay, and author of the book, “The Three Faces of Executive Liability.”
“It comes as a surprise to a lot of people that property and liability insurance companies, in a general cumulative way, have not made money on the transaction of collecting premiums and paying out losses,” he said. “In the last 12 to 14 years, they have not made a profit. Overall, they’ve made big profits, but they come from the offsetting of losses paid by investment income. The whole process of holding premiums until the court renders a verdict or a settlement is reached allows the companies to invest that money and make significant sums on the investment.”
According to the Academy of Producer Insurance Studies, key findings on survey results from nearly 400 agents regarding coverages, insurers, marketing issues and claims experience include:
• Nearly two-thirds of surveyed agencies use wholesale markets for their executive liability insurance.
• Regarding premiums, the majority of agencies describe the five-year trend of the employment practices liability (EPL) markets as becoming much softer.
• More than 60% of agencies surveyed indicate that the CEO is the person who makes the final decision to buy, or not to buy, executive liability coverages.
• Agencies have noticed the most EPL claims deal with wrongful termination and sexual harassment exposures far more frequently than other claims exposures.
Because of uncertainty in the investment market, insurance companies no longer make as high a return, such as a 30% annual return on a stock portfolio, Clarke said.
Because executive liability policies cover the cost of paying for a defense attorney, many CEOs consider it a major benefit of coverage, Clarke said.
“If you’re a small business person looking for quotes for D&O liability insurance, you could expect to see a range of premiums,” he said “Some insurers would write a $1-million limit for D&O liability insurance for a premium under $10,000 a year. Others, looking at the same risks, and who are not as interested in putting the account on their books, might quote $15,000 a year, saying they’re a more solid insurance company.”
Executive liability coverage is determined by the financial viability of the organization and the strength of its leadership, Clarke said.
“For example, a brand new dot-com organization that wants D&O liability, where the principals are all under 25 years of age, is probably going to pay more for the same limit and type of coverage than an organization that is established and has been in business for 50 years, with a good operating record and solid financials,” Clarke said. “In fact, the marketplace has been burned a lot in the last year and a half by emerging dot-com situations, where insurers have rushed in and quoted low prices, and have now found themselves in pending allegations after the companies suffered a severe financial setback or went out of business, as many of them have.”
A private company will pay less than a public company for the same coverage because a public company has an additional plaintiff class of shareholders, Clarke said.
“When quoting premiums for executive liability insurance, the number of employees doesn’t matter as much as assets and annual revenues, unless you want to include coverage for employment practices liability, such as discrimination, sexual harassment, wrongful termination,” he said.
Because executive liability comes in three forms — EPL, D&O, and Fiduciary Liability — there is no standardization of executive liability policies, and explanations of the different coverages available can be quite complex, said Cuprisin.
When surveyed for this article, Tony Bailey, CEO of Business Communications Inc. in Ridgeland, like many busy executives in Mississippi, said simply, “I have asked my insurance agent to keep me informed.”
Contact MBJ contributing writer Lynne Wilbanks Jeter at email@example.com or (601) 853-3967.