1. Directors & Officers Liability:
What You Need to Know
Dennis Gustafson,
SVP & Financial Institutions Practice Leader
2. Agenda
• Introduction of A H & T
• D&O Risk Profiles and Claims/Litigation trends related to
– Regulatory Exposures
– Mergers & Acquisitions
• D&O Limits benchmarking
• D&O ‘top 10’ coverage enhancements
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3. About A H & T Insurance
• A H & T was established in 1921 with headquarters in the DC metro, Seattle, and NJ.
• Privately held, Employee owned and Independent full service insurance brokerage and risk
management consultant.
• AH&T has also been recognized as one of the "100 Largest Brokers of U.S. Business" and
“Best Places to Work in Insurance” as ranked by Business Insurance magazine and “top ten
D&O insurance brokers in the nation” in the independent Tillinghast Towers-Perrin Directors
& Officers Liability insurance report.
• The Financial Institutions Practice at AH&T Insurance focuses on providing Management
Liability solutions for community and regional banks with three basic principals:
– Knowledge: With years of experience in the underwriting, brokerage, claims, and legal fields we
have assembled a team of subject matter experts obtaining the best-in-class terms and conditions.
– Leverage: We obtain the most competitive pricing by leveraging the volume of placements with the
Insurance Carriers that focus on the asset size and specialization of our clients.
– Responsiveness: As an employee owned company for over 90 years, every AH&T employee is
completely vested in providing unparalleled responsiveness and professionalism.
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4. D&O Claims Trends
Regulatory exposure
• Regulatory risk continues to be the single largest concern for D&O underwriters although we see an
interesting data inflection:
180
# of FDIC D&O Total Damage Claims
160 Time Period
Defendents (000,000)
140
120 Class Action 2000 - Q3 2010 53 $1,360
100 Filings related to
2010 Q4 56 $1,130
the Credit Crisis
80
2011 Q1 49 $1,083
60 Failed Banks
40 2011 Q2 80 $3,187
20
2011 Q3 56 $464
0
2008 2009 2010 2011 2011 Q4 79 $376
• FDIC updated their Professional Liability Lawsuits page (www.fdic.gov/bank/individual/failed/pls/index.html)
to reflect that the number of lawsuits that it has authorized has been increased. While FDIC has up to 3 years
for tort claims and 6 years for breach of contract claims, the site states that most investigations are completed
within 18 months.
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5. Bank Failure trends
Future Failures
High Risk Bank Counts
by State, 3Q 2011
> 10
5 to 10
3 to 5
Source: Trepp Bank Navigator 1 to 3
0
180
Actual Low Hi
160
140
120
Bank Distress
100
80
Bank Failures per Year
60 — Current Cycle
40
20
0
2007 2008 2009 2010 2011 2012f
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Sources: FDIC, Trepp LLC
6. When is a Bank considered a ‘Regulatory Risk’
• Formal Written Agreement
• Consent Order
• C&D
• MOU (relating to asset quality, earnings, or capital, not so much for Bank Secrecy)
• Severe degradation of asset quality following a regulatory exam or audit where the
expectation would be a regulatory restriction on the following exam. (Classified Assets > 75%
or Tier 1 capital ratio <6%)
• Qualities of an institution taken off the Regulatory risk category include, Removal of
regulatory restriction, positive ROA 3 quarters, Classified loans/Capital <= 40%
• D&O Policy considerations:
– Lack of Regulatory Exclusion
– Named Insured = Holding Company
– Side A Non-Rescindable language
– Insured vs. Insured Carve-backs
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7. D&O Claims Trends
M&A
• Stanford Securities estimates 188 Securities Class action lawsuits in 2011, 39 of which were
related to Chinese reverse mergers or U.S. listed Chinese companies.
• Of the 149 non-Chinese related suits, we count 53 M&A related cases or approximately 36%.
This represents a significant increase from 24% in 2010. M&A claims can relate to perceived
improper pricing/valuations, going private transactions, management buyouts, and/or
allegations of proxy violations.
• Underwriting considerations include % of shareholder votes against the M&A in addition to
evaluation of dissenting shareholders
• D&O Policy considerations:
– Mid-term acquisition threshold %
– Discovery provisions
– Change of Control provisions
– Cancellation provision
– Existence of an M&A exclusion
– Typically no prior acts for acquired company
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11. Directors & Officers Coverage discussion
Top 10 D&O Coverage enhancements
– Named Insured = Holding Company
– Civil Money Penalties (state specific)
– Limit Definition of Application to filings for just the past 12
months.
– Update Definition of Claim to include informal investigations
– Investigative Costs sub-limit
– Order of Payments
– Side A Non-Rescindable language and limit the imputation of
knowledge (severability)
– Update definition of Company to include Debtor-in-Possession
– Insured vs Insured carve-backs for:
• Creditor Committee, Bankruptcy Trustee
• FDIC
• Whistleblower, prior Board member, foreign equivalent
– Limit when Insurance carrier can cancel policy
Side A Insurance protects the individual Directors
& Officers for claims where the Insured company – Limit the threshold of the conduct exclusions (fraud & personal
can not indemnify the D&O’s in scenarios such as profit) to the ‘final adjudication’ standard.
insolvency and derivative actions.
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12. Contact Information
Primary Contact
Dennis Gustafson, SVP & Financial Institutions Practice Leader Contact us when…
p: 973.286.3572
c: 917.846.5548 You receive notice of a claim
e: dgustafson@ahtins.com
Circumstances occur that may give
rise to a claim
P&C Practice Leader
Mergers or acquisitions occur
Peter Dean , Principal
p: 703.669.1135
A subsidiaries or spin-off is created
c: 603.380.2557
e: pdean@ahtins.com Secondary, follow-on or debt offerings
are planned
Secondary Contacts
The SEC initiates an investigation of the
Michael Tomasulo, SVP & Directors & Officers Practice Leader Company or individuals
p: 973.286.3570
e: mtomasulo@ahtins.com
Asking employees to sit on the board of for
profit companies
Account Manager
Jonathan Maio 20% or more of the Company’s stock
p: 973.286.3571 will change hands
e: jmaio@ahtins.com
A bad news disclosure occurs
Claims Director Reviewing limits of liability and scope
Rick Hirschoff, MA, MSW, SCLA of coverage
p: 703.737.2259
e: rhirschoff@ahtins.com
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