The Intelligent Quarterly from the publishers of The Insurance Insider

Summer 2013

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Players in the directors' and officers' (D&O) insurance market will be ducking behind the parapet in the coming months, after the fraught IPO of Facebook had company investors reaching for their lawyers.

But the experience of underwriters on other high-profile D&O programmes - including RBS, JP Morgan and MF Global - has been variable in recent months.

An April report from Pricewaterhouse Coopers (PwC) said companies in the high-tech industry were named in more filings (23 percent) than those in the financial services industry (12 percent) for the first time since 2007 (see table).

Yet despite the high-tech nature of Facebook, it is the financial sector that is proving the headache for D&O underwriters once more. Click to enlarge

As sister publication The Insurance Insider reported in late May, there were concerns that some of the mudslinging relating to Facebook's IPO was likely to stick to the company's HCC-led $200mn D&O policy. Investors filed a $2.5bn lawsuit as the $104bn IPO began to lose value shortly after listing on 18 May, accusing Facebook management and book runners Morgan Stanley, Goldman Sachs and others of misleading them over the company's earning power.

Meanwhile, towards the end of May a New York judge confirmed an earlier ruling allowing executives from defunct broker-dealer MF Global to recoup defence costs from D&O underwriters as well as from the firm's errors and omissions (E&O) policies.

MF Global commodities clients had argued that they were exclusively entitled to the proceeds of MF Global's $250mn D&O programme - of which $150mn is A-side only - and $150mn E&O insurance policy.

Elsewhere, the underwriters of investment bank JP Morgan (JPM)'s D&O coverage look set to avoid any losses on an XL Bermuda-led $500mn insurance programme, despite current class action lawsuits and federal investigations into the bank's mounting in-house trading losses.

Sources have reported that no claim has been made against JPM's D&O cover to date, as the investment bank itself - rather than the individual directors - is likely to foot the bill for legal action.

However, the primary layer may face expense claims for CEO Jamie Dimon and CFO Douglas Braunstein's legal costs in defending the case, sources said.

A £200mn+ D&O policy led by Novae in 2008 may also be in line to pay hefty defence costs after RBS directors were slapped with a £2.4bn shareholder lawsuit in March. An 8,000-strong shareholder action group - consisting of 7,400 individual UK shareholders and 80 institutional investors - filed a £2.4bn suit against the bank and 17 former directors following a £12bn rights issue in April 2008.

The recent spate of shareholder lawsuits seems to rub against the grain of industry commentators telling us that the number of D&O settlements is at a 10-year low. PwC's April report said that the number of cases settled in 2011 declined by 30 percent to the lowest level since 1999, with 69 settlements reached. However, the study showed that the total value of settlements increased 17 percent to $3.4bn in 2011, reversing a six-year trend of falling total settlement values. The average settlement size also increased sharply to $51.2mn.

Nonetheless, Cornerstone Research's annual study said that both the number and total value of 2011 settlements represented 10-year lows. And even though settlements are ebbing, defence costs could be the real killer for D&O underwriters, who will be hoping to step out of the spotlight again.