I have just returned from a journey around the world to launch DARCstar in Hong Kong, Australia and Singapore. It has been a fascinating trip (not to say slightly surreal moving from autumn to spring and then back again to autumn via the equatorial heat). The temperature of the claims environment also differed considerably with Australia comfortably topping the league in that ranking.
I was fortunate enough during my travels to meet a number of board members, lawyers and senior risk officers of large companies in each of the countries I visited.
They included Paul Cooper, ex-Chairman of Centro Group. Indeed, it was Paul who, as key note speaker at our Melbourne launch, posed the question which is the title of this article.
He was able to speak with more authority than many about what it was like to be caught in the eye of a large D&O liability storm. He made a powerful case for greater focus being placed by board members on the scope and terms of cover.
Don’t Confuse Value with Price
Paul urged our Melbourne delegates not to confuse value with price. Whilst a message along these lines might sound like good and obvious common sense, it nevertheless begs an important question.
It is all too easy in a low-claims environment (such as the UK) to take policy terms and conditions as read and focus instead on costs savings.
Arguably, D&O liability insurance is treated in many countries as a commodity with one D&O policy being regarded as much the same as another. The temptation to do this in a form where the wording often runs to some 20 or 30 pages is considerable.
Detailed comparative reviews are hard to come by and expensive to commission. Indeed, at premium levels “1 per mil.” or lower i.e. £1,000 premium (or less) for £1m of cover, it may well be cheaper to buy an additional £10m or even £20m limit rather than to commission a legal review.
The trouble with this approach is that coverage problems (much like unexploded mines) tend to lie submerged until detonated by the impact of a large claim. To risk another cliché, the tip of the iceberg may seem to offer a beacon of useful affirmative cover while the real issues remains buried beneath the surface.
Here are a couple of examples:
Insurers sometimes offer either a pollution defence costs sublimit or even a modest additional limit. Whilst that may sound an attractive additional benefit, it is very likely to conceal exclusionary language which removes from the scope of cover any other pollution related cover including legal representation expenses which may need to be incurred by directors in connection with an investigation or enquiry arising from a pollution incident.
One might also ask, if there is a serious incident involving pollution, why the defence costs relating to a proceeding or prosecution involving directors should be subject either to a sublimit.
Another serious issue (particularly for those policies covered by English Law) relates to insurers’ ability to reserve their position with regard to the entirety of the limit of cover in the event of allegations levelled at individual board members involving fraud or dishonesty.
Almost all policies contain language in clauses often headed “severability” or “non-rescission” which appears to provide a measure of protection for those insureds against whom no allegations of fraud or dishonesty have been made. Unfortunately, many such clauses do not deliver quite what they appear to deliver.
The question which Paul Cooper posed in Melbourne was a rhetorical one. His answer was that he would not welcome the news that there had been a saving of cost on the occasion of renewal of the company’s D&O programme; his assumption being that this saving would have had some impact on the scope or terms of cover.
My question though is a different and even more basic one: how often do board members in large companies have the opportunity to make an informed choice between value and price in the first place?
The contrast with errors and omissions policies where the buying decisions (based on quality of cover as well as cost) are usually made by senior partners (or their equivalent) in large professional services practices is a stark one.