D&O climbs the agenda

As litigation developments mean that directors have never held more responsibility, directors' and officers' insurance (D&O) is becoming more important to mitigate the increasing risks they face.

Litigation has bitten hard in the US and without question, will bite UK boards too. The increasing involvement of hedge funds in UK and US markets, the growing propensity of US authorities to detain or extradite, the Company Law Reform Bill, the Pensions Act and in the US, Sarbanes-Oxley, all serve to increase the threat that litigation will be more frequent and more successful.

In the US, Section 404 of the Sarbanes-Oxley Act makes directors personally accountable for the systems, processes and controls upon which the company relies for its financial reporting. These requirements apply to the directors of any company, whether domestic or foreign, with a US listing.

In the UK, corporate governance requirements are likely to develop. The new Companies Act, for the first time in the UK, provides a legal definition of directors' duties and a broader range of stakeholders to whom directors owe statutory responsibilities. It also gives shareholders the right to bring a 'derivative action' - all of which increase the chance that litigation will be successful.

Already, the Pensions Act is changing the way UK boards behave - not only affecting decision-making around acquisitions and disposals, but requiring companies to make a fundamental overhaul of trustee recruitment, training and development.

On the surface, the raft of transatlantic reform should be welcomed

On the surface, this raft of transatlantic reform should be welcomed by shareholders and insurers alike. It has triggered a change in boardroom behavior and a tangible improvement in internal controls, and it has sharpened directors' focus on the importance of risk management. Perhaps in recognition of these positive changes, the D&O market remains competitive.

Certain markets prefer to limit their involvement to the 'for profit' (where the stock is closely held) and the 'not-for-profit' sectors, both of which have always been a popular, if extremely competitive, sector of D&O business. There is less volatility through lower exposures and boards are not under scrutiny from institutional investors. For heavier exposure D&O business, there is still a decent level of interest.

There are a significant number of writers, sufficient (though reduced compared with the 1990s) capacity, and reasonable rates on offer.

The question is, however, will that capacity still be there if, despite the best efforts of directors on both sides of the Atlantic, litigation increases?

The question is, will capacity still be there if litigation increases?

Since interest in the risk class remains strong, and as exits in the business typically take place after the hurt has been experienced, we presume the appetite will remain for some time to come.

Steve Langford