Wage Discrimination Bill First to Move to Obama's Desk
January 28, 2009 - BestWire Services

Legislation that could open the door to more discrimination claims on directors and officers policies looks to be the first bill that will be signed by President Barack Obama, as the U.S. House of Representatives moved to pass a measure dubbed the Lilly Ledbetter Fair Pay Act.

Sponsored by Sen. Barbara Mikulski, D-Md., S. 181 cleared the House by a 250-177 margin, having passed the Senate a week earlier 61-36. Obama has said he would sign the bill Jan. 29 in a White House ceremony.

Named for an Alabama woman whose wage discrimination case against employer Goodyear Tire & Rubber Co. became the subject of a 2007 case before the U.S. Supreme Court, the bill would undo the court's 5-4 decision that federal discrimination law requires such claims be filed within 180 days of the first offense. The U.S. Equal Employment Opportunity Commission had contended the statute of limitations applied to the final unequal paycheck.

"The 2007 Ledbetter Supreme Court decision has already had a chilling impact on hundreds of discrimination claims," said House Education and Labor Committee Chairman George Miller, D-Calif., in a statement. "It wasn't Lilly Ledbetter's fault that Goodyear decided to pay her less because she was a woman. But a narrowly divided, ideological Supreme Court said that even though her company had engaged in illegal pay discrimination in secret for decades, she would have to live with a smaller pension and Social Security benefit for the rest of her life."

Once signed, the bill would codify the EEOC's preferred standard as a part of the 1964 Civil Rights Act. Although focused on wage discrimination based on gender, it also would apply to that law's protections from discrimination based on race, religion, national origin or disability. The law's text declares it would "take effect as if enacted on May 28, 2007," one day prior to the Supreme Court ruling.

A separate House version that earlier passed the chamber Jan. 9 would have demanded that employers who are defendants in gender discrimination cases have a burden to prove that discrepancies in pay between similar employees were based on non-discriminatory business reasons. The Senate version, which ultimately cleared both houses, deals solely with the statute of limitations.

The measure had support of organized labor, and has drawn concern from business groups, including the U.S. Chamber of Commerce.

"The chamber strongly supports equal employment opportunity and effective mechanisms to achieve this important goal," said Randel Johnson, the U.S. Chamber's vice president for labor policy. "However, further increasing the opportunity for frivolous litigation would only further serve to undermine America's civil rights laws."

Elusive D&O coverage forces financial institutions to go bare 
January 27, 2009 By David Dankwa - SNL Financial News

As financial institutions find it exceedingly difficult to obtain adequate levels of liability insurance for their directors and officers, many are increasingly having to choose between operating completely naked — without any insurance protection — or barely clothed at all.

If a bank is fortunate enough to have D&O coverage, chances are it also experienced a sharp increase in premiums, said Karen Kutger of Professional Risk Solutions, a wholesale insurance broker specializing in executive and professional liability insurance products.

"They're reducing the coverage, [which means] they're either taking away some enhancements that you had in prior years or they're reducing the capacity they have on each and every account. It's almost impossible to find additional capacity," Kutger told SNL.

The panic in the D&O marketplace is a reflection of the turmoil in the financial markets and widespread concerns that potentially, billions of dollars of insured losses could arise from the credit crisis and its attendant bankruptcies and litigation.

Industry sources estimate that D&O and errors and omissions insurance providers could see combined claims of about $10 billion before the dust settles, Benny Yuen, a senior actuarial adviser with Ernst & Young, told SNL. But as he also stressed, that figure is only a rough guess.

"The current market condition is so fluid it really makes the estimate almost like a moving target," Yuen said.

According to Yuen, massive D&O claims are expected from the slew of securities class-action lawsuits filed against financial institutions. To a lesser degree, errors and omissions insurers are bracing for claims against parties, such as brokers and lenders, that have had any involvement in mortgage transactions.

"We're already seeing an increased number of lawsuits against those professionals," he said.

Recently, a Stanford Law School and Cornerstone Research study showed that the level of federal securities class-action activity during the last year was at its highest since 2004, dominated by actions taken against firms in the financial services sector. As the researchers found, almost half of the litigation activity, 103 securities class-action complaints, involved firms in the financial services sector. The report also noted that maximum dollar losses attributable to 2008 claims jumped to $856 billion, a 27% increase from comparable 2007 data.

The report also makes no mention of another unfolding storm: the Bernie Madoff scandal. The case, involving an alleged Ponzi scheme that allegedly caused investors to lose as much as $50 billion, is casting a large shadow over the D&O marketplace, said Kutger.

"Everybody is reviewing their exposure to Bernie Madoff, [and] at this point, I'm not sure the carriers really have their arms around what kind of exposure they have," she said. "Not only do they have exposure on the hedge funds and the investment advisors, they also have exposure on all the nonprofits that were invested in the Madoff funds. It's really going to take a while to filter through the system in terms of each true exposure to the D&O marketplace."

Claims from financial institutions that have gone belly-up, such as those related to investment banks Bear Stearns Cos. LLC and Lehman Brothers Holdings Inc., are also expected to significantly increase insurers' overall exposure. Since Lehman filed for bankruptcy, its insurer can no longer expect the company to pay its share of losses, known as a retention, and as such must begin to pay all claims from the first dollar.

"These retentions usually start at $250,000," Kutger said.

The challenges in the D&O marketplace have created a body of insureds unable to afford coverage and those that simply cannot get the coverage even if they could afford it, said Kutger, who argues that this could further slow down the economy. In fact, for many financial institutions, having D&O insurance has traditionally made a big difference on the caliber of professionals they attract to their board.

"If they can't get coverage, nobody would want to sit on that board because no one wants to put themselves in that type of situation," she said.

D&O Premiums on the Rise for Financial Institutions, Capacity Shrinking
January 27, 2009 - National Underwriter

Property/Casualty Market Report: 
Financial crisis pushes some D&O rates sharply higher; But many buyers outside of finance see prices fall further
January 19, 2009 - Business Insurance
 
The financial crisis has driven up the frequency and severity of securities fraud claims, but directors and officers liability insurers were taking a measured response at year-end renewals, market executives and risk managers said.
 
D&O insurance rates have ballooned as capacity has shriveled for financial institutions, the litigation targets that securities fraud plaintiffs have focused on so far, according to market experts. Companies with large market capitalizations also faced tightening market conditions.
 
But most other risks, including some traditionally tough-to-place buyers, were negotiating lower or flat rates and obtaining as much capacity as they wanted, experts said.
 
"There are two separate areas" of the D&O insurance market-"financial institutions and everyone else," said Lou Ann Layton, a managing director with Marsh Inc. in New York.
 
"The market as a whole is still fairly soft," said broker Karen Kutger, a Philadelphia-based vp for Professional Risk Solutions L.L.C.
 
"There are rate decreases, but this is a transition from a soft market environment to a hardening market environment," said Nikolaj Beck, the Zurich, Switzerland-based head of Industrial Risk Insurer, a division of Swiss Reinsurance Co.
 
The overall market to date has not tightened even with securities fraud claims spiking since mid-2007.
 
Plaintiffs last year filed 210 securities class actions compared with 176 in 2007, according to the Stanford Law School Securities Class Action Clearinghouse in Palo Alto, Calif., in cooperation with Cornerstone Research of Boston.
 
The final 2008 tally is the biggest total since plaintiffs filed 215 securities class actions in 2004, according to the clearinghouse.
 
Subprime-related allegations are having an increasing impact on securities claims, the report says.
 
D&O underwriters understand that the financial institutions sector is driving up claims and have responded in a measured way so far, insurers and brokers say.
 
"The D&O underwriting community is very good at reacting to circumstances, but not anticipating circumstances," said Carl Pursiano, a New York-based senior vp with Liberty International Underwriters, a unit of Liberty Mutual Group Inc.
 
That response amounts to boosting financial institutions' D&O insurance rates 20% to 100% while halving their limits, according to market experts.
 
In addition, "anything related to leverage," or debt-financed investments, has "become very difficult" to underwrite and, therefore, the coverage is increasingly expensive, said Greg Flood, the New York-based president of IronPro, a division of Bermuda-based Ironshore Insurance Ltd.
 
Those risks include real estate and asset management operations, Mr. Flood said.
 
Insurers also are reducing capacity offered to hedge funds and private equity firms, he said.
 
"The list keeps getting longer," Mr. Flood added.
 
However, midsize financial institutions have faced smaller rate hikes and generally can obtain as much capacity as they need, Marsh's Ms. Layton said.
 
"I think carriers are acting fairly regarding the financial institutions sector," said Mike Rice, the Denver-based chief executive officer of Aon Financial Services Group, a unit of Aon Corp.
 
Despite the drastically tightening D&O market for financial institutions, their rates remain less than half of what they were at the end of 2003, Mr. Rice said.
 
Large market cap companies and smaller companies that have seen their market cap shrink also face rate hikes ranging from 5% to 20%, Mr. Pursiano said. Insurers are wary of those risks, too, because they traditionally are prime targets of securities fraud plaintiffs, he said.
 
Meanwhile, "it's still competitive elsewhere" for most risks, according to Mr. Rice.
 
D&O buyers were able to negotiate rate cuts throughout the fourth quarter, though reductions were "narrowing a bit" from the 11.3% cuts on average that insurers offered during the third quarter, Mr. Rice said.
 
Mr. Pursiano estimated that underwriters were cutting rates 5% to 15% for attractive risks.
 
Privately held companies could more easily negotiate a 10% reduction, while publicly traded companies could expect 5% decreases, Professional Risk's Ms. Kutger said.
 
Insurers are "trying to hold as much rate as they can, because of the financial institution claims that they know they'll have to pay," she said.
 
Ultimately, insurers have to engage in "cash-flow underwriting to get premium on the books to pay those claims," Ms. Kutger said.
 
Meanwhile, "there's every bit as much capacity as there was a year ago," Mr. Rice said. "In fact, I might say you could get more" limits now than a year or so ago, he said.
 
Liberty International's Mr. Pursiano agreed but also said he has seen some buyers who are troubled about how potential claims would be handled voluntarily limit their capacity options to steer clear of insurers if they or their parent companies are financially stressed.
 
Marsh's Ms. Layton agreed. She also noted that those buyers pay more for their coverage.
 
For nonfinancial risks, insurers also are not pushing tougher terms and conditions, market experts said.
 
But some D&O buyers opted for larger deductibles in exchange for bigger rate cuts, Aon's Mr. Rice said.
 
Even traditionally tough risks-including pharmaceutical, biotechnology, health care and telecommunications companies-negotiated rate cuts at year-end renewals, Aon's Mr. Rice said. Their rates, however, still are higher than those for other nonfinancial sector risks, he noted.
 
Rates for energy and consumer staples companies, however, also were headed up, generally tracking their respective 10% and nearly 5% increases during the third quarter, Mr. Rice said.
 
While the D&O market is not as soft as it has been in recent years, some risk managers have higher priority concerns than their rates.
 
"I see people focusing on the global aspect of D&O," said Leslie Lamb, manager-global risk management at Cisco Systems Inc. in San Jose, Calif.
 
D&O coverage for management in foreign countries "needs to become more efficient" in managing claims and issuing policies, Ms. Lamb said.
 
For the first half of 2009, several experts predicted continued stabilization of rates, but with some risks able to negotiate small decreases.
 
But Swiss Re's Mr. Beck said he expects that most risks will face rate hikes during 2009 as insurers' loss experience deteriorates.

Property/Casualty Market Report: 
E&O prices begin to firm during year-end renewals
January 19, 2009 - Business Insurance article

Brokers and insurers disagree over whether professionals could negotiate rate cuts during year-end renewals, but they concur that the errors and omissions liability insurance market is not as soft as it was a year ago.
 
Brokers say good risks were able to negotiate flat rates to 10% reductions. Insurers say rates for those buyers ranged from flat to 20% higher.
 
The estimates exclude financial institutions, which faced steep rate hikes and were the only type of E&O insurance buyer that could not purchase adequate capacity, market experts said.
 
Rate reductions during year-end renewals ranged from 5% to 10% compared with 10% to 15% a year ago, said broker Sandy Codding, a managing director and the co-leader of the U.S. E&O practice at Marsh Inc. in New York.
 
Unlike previous renewal periods, there was little difference in rates among different classes of professionals, Mr. Codding said.
 
Broker Karen Kutger, a Philadelphia-based vp for Professional Risk Solutions L.L.C., said, "The E&O market is still definitely soft."
 
But she noted that incumbent insurers were trying to hold on to as much premium as they could.
 
"Underwriters definitely are holding on to the flat premium mode longer, until you show them you have another offer," Ms. Kutger said. "They're definitely asking for proof" of a competing offer, "so there's no more bluffing" by insurance buyers, she said.
 
When an account moves to a different insurer, a 10% rate decrease typically can be negotiated, she said.
 
Bruce Eisler, a senior vp in New York with Liberty International Underwriters, a unit of Liberty Mutual Group Inc., said rates began stabilizing rapidly late in the third quarter or early in the fourth quarter of 2008. At that point, most risks outside the financial institutions sector could negotiate flat rates to 5% increases, he said.
 
The only rate decreases Mr. Eisler said he has seen are some "modest" reductions for excess capacity for lawyers with good claims history.
 
Mr. Eisler said many lawyers have purchased additional capacity because of their exposure to claims related to the declining economy. Those attorneys had advised investors that fared poorly or companies that reported huge losses, he said.
 
To date, Mr. Eisler said he has not seen a meaningful increase in claims against attorneys, but there is "a strong possibility for it."
 
For most professional risks, "the market is hardening and must harden," said Nikolaj Beck, the Zurich, Switzerland-based head of Industrial Risk Insurer, a division of Swiss Reinsurance Co.
 
Technology and construction firms requested up to 20% rate cuts, but Swiss Re typically offered them flat rates-which put those risks in a better position compared with most other professional liability risks, Mr. Beck said.
 
Health care accounts also sought reduced rates, but Swiss Re would not "entertain that," Mr. Beck said.
 
Accountants were able to negotiate flat rates if they were small but faced a 20% increase if they were large, he said.
 
Liberty International's Mr. Eisler noted that architectural and engineering firms with international operations also faced large premium increases because their revenues had grown significantly.
 
But no professional risk faced a tougher renewal than financial institutions, market experts agreed.
 
Incumbent insurers often refused to renew their coverage, Professional Risk's Ms. Kutger said. When those accounts found coverage, they typically had to settle for a 10% premium increase and half the limits they had, she said.
 
Mr. Beck said he expects rates to rise "modestly" during the first half of 2009. Mr. Eisler projects increases of 5% to 10%, but he said rates could stabilize by year-end if losses do not accumulate as expected.
 
But Ms. Kutger said insurance buyers should brace themselves for a potentially rough year. "The big thing for people to understand is that it could go into a hard market overnight," especially if a major E&O insurer were to go under.
 
For insurance buyers, "it's important to anticipate what effect the economic and credit situation will have on their business and exposures," Marsh's Mr. Codding said.
 
If buyers can give underwriters "a clear answer on that, it will help them get the best quote," Mr. Codding said.
 
He also advised buyers to provide insurers detailed information on controls in place "to prevent anything from undermining their business models and risk controls."
 
"For example, when times get tough and companies are desperate to make sales, there may be an inclination by salespeople to circumvent some controls to close a deal," Mr. Codding said. "So underwriters need information on how that would be prevented."

D&O and E&O Losses from credit crisis estimated at $9.6 Billion

The meltdown in the subprime mortgage business and its fallout in the wider credit markets will cost insurers $5.9 billion in losses in D&O actions, and $3.7 billion in E&O losses according to new reports issued November 4th by Advisen Ltd., a provider of analytics to commercial insurers. That's $9.6 billion total. What does this suggest from the agent and broker perspective?

Some interesting nuggets from the report:

• According to Advisen's forecast, D&O losses will far exceed earned premium for the Financial Institutions segment of the market. Expect premiums to keep soaring, perhaps even into other categories. Securing D&O in these segments will require creativity.
• In E&O, mortgage brokers are likely to see a lot of smaller lawsuits, while the lenders see fewer, but much larger, lawsuits. Upshot: E&O premiums are climbing in the whole FI category.
• In E&O for financial institutions, already-troubled AIG holds the lion's share of the coverage (34%) followed by Chubb at 20%.
• Expect a lot of coverage disputes in the upcoming suits, especially around fraud and conduct exclusions and prior acts exclusions.

You can download a .pdf of the Advisen E&O report at no charge here.

You can download a .pdf of the Advisen D&O Report at no charge here.

Additionally Advisen’s full report on the financial services industry is available here.

How to Secure D&O for Financial Institutions:Bloomberg Article

It's no secret that D&O carriers are declining and non-renewing financial services companies left and right, and it is likely to get even worse. Does that mean your financial services clients -- banks, lenders, brokers, and the like -- will be forced to go bare? Not necessarily.

In a recent article in Bloomberg Law Reports our own D'Andre Salter and Rick Grimes lay out a strategy for securing coverage for your FI clients -- even in this 'impossible' climate.

Your best strategy?
• Start negotiating early. This will take time.
• Go one-on-one-with underwriters. Be an individual, not a class.
• Differentiate you management, strategies, operations.
• Explore alternate and creative coverage options.

If you're approached by a client in the financial business for either E&O or D&O, it will take some delicate maneuvering to secure acceptable coverage. You can read our recommendations here.