Monthly Newsletter

What's the hottest topic around boardroom tables this spring? Enron? Accounting? Try insurance. Terrified by the rash of corporate meltdowns, board members everywhere are rushing to check the terms of special policies, called directors and officers (D&O) liability coverage, that protect company officials against lawsuits. Meanwhile, insurance companies, caught off guard by an explosion in securities litigation, are jacking up rates, limiting coverage, and bracing themselves for one of the worst years on record.

Rates for D&O insurance were climbing even before Enron, in part because insurance companies wrote too many cheap policies during the late 1990s. Many thought that legislation Congress passed in 1995 would make it much harder for shareholders to sue. Instead, the number of securities claims ballooned. Some 480 class-action securities fraud suits were filed in 2001, up 125% from the year before, according to a study by Stanford University Law School.

Plaintiffs, meanwhile, are seeking larger damages than ever. Until now, the largest settlement of a 2 shareholder suit was the $3.2 billion Cendant paid out in 2000. That amount will be dwarfed by the Enron case, even if the litigation is ultimately settled for a fraction of the $60 billion in market value shareholders lost. Enron's $350 million D&O policy, purchased from eight different carriers, will almost certainly be exhausted. That means former company officials may face devastating claims against their personal assets. And that's if Enron's D&O insurers pay at all: If a customer misrepresented its financial condition when it bought the policy, the insurance companies are off the hook.

D&O premiums are expected to rise between 35% and as much as 300% this year. That's serious money: Large D&O policies already cost $15,000 to $20,000 per $1 million of coverage. The exact costs vary substantially by company size, industry, location (those based in New York and California, where the most securities cases are filed, pay more), and claim history, says Susanne Murray, who heads the U.S. D&O practice for insurance broker Willis Group Holdings.

Insurers are also narrowing policy terms, instituting deductibles, and insisting companies pay a portion of every claim themselves. Instead of three-year policies, coverage will now be subject to renewal every year, and insurers will reserve the right to rewrite policies if a company holds a secondary stock offering or makes an acquisition worth more than 10% of its current assets, says Tony Galban, D&O underwriting manager at insurance company Chubb.

With insurers balking at shouldering $100 million policies alone, companies will have to arrange for many more layers of coverage-each from a different insurer. That raises costs. Given the expense, some companies are deciding to forgo D&O insurance altogether. The only question is, Without coverage, will anybody be brave enough to join the board?