—Jim Lash, Hylant Group

The Securities and Exchange Commission this year has grown aggressively more vigilant in its examination of executive compensation—much in the wake of Sarbanes Oxley, but also on the cusp of an emerging new landscape of corporate governance.

Leading this summer's agenda is stock option backdating—a questionable maneuver that found greatest prominence shortly after Sept. 11, when the Dow dipped to historic lows, and public companies seized the opportunity to reward and retain top talent.

But the SEC's search for questionable stock options isn't limited to 2001. The commission has been examining transactions throughout the 1990s and before. More than 100 companies now are under investigation, including Home Depot, Merrill Lynch and Black & Decker for transactions since the late 1980s. The Department of Justice has filed several lawsuits, and the SEC appears to be teaming with eager investigators searching for more.

Throughout the past year, the fed has revealed a newfound determination to pursue its agenda in a variety of ways, including the so-called 'Katie Couric' rule, floated past legislators last month. The rule would have required publicly traded companies to disclose top pay of its non-executive employees.

While it now appears that Katie's $20-million secret is safe with CBS, the proposal exposes a trend targeted squarely at corporate America's top tier. It works in tandem with increasingly higher securities class-action settlements, which according to the 2005 Tillinghast report, now average some $27 million before attorney fees.

This year is expected to be yet another boon of hefty settlements, as IPO laddering cases from 2001 mature and many of the opt-out claims and co-defendant cases come to fruition. Parallel proceedings on securities cases, such as criminal proceedings, ERISA tag-along cases and derivative actions, also are on the rise.

Although monetary settlements in derivative actions have tended to be relatively moderate, averaging about $4.2 million, the cost to defend these cases can be substantial. As such, the plaintiff's bar will continue to pursue derivative cases at the state level because of the lower pleading standard and relatively quick entry into legal discovery, which help pave the way for parallel federal securities proceedings.

But the current market for executive coverage is replete with contradictions. While signs of further executive crackdown seem eminent, average settlements continue to grow, and the plaintiff's bar continues to reveal creative new methods of legal pursuit, the market continues to show signs of softening, thanks mostly to high capacity, hovering near $1.5 billion.

This stable capacity level has driven down pricing in both the primary and excess layers, especially for publicly traded companies with a market capitalization of less than $5 billion. Added to that, securities case filings are also trending downward according to Cornerstone Research, as last year saw the fewest such filings since 1997 with only 179. Through June of this year, there were just 61 filings, representing a 45-percent reduction from the 111 filings recorded the same time last year.

Though pricing trends, fewer case filings and available capacity indicate that the directors’ and officers’ market is stable and softening, conflicting statistics and new challenges continue to create uncertainty among insurers. It is too early to exact what effect all this will have beyond 2006, but for now, publicly traded companies should at the very least be prepared to address the myriad of underwriting questions surrounding stock-based compensation.

The Side-A Phenomenon
As long as regulatory scrutiny persists and plaintiffs become more vigilant in holding individual directors and officers personally accountable, the focus on individual protection will continue to be a high priority for risk managers. Though the personal contributions by outside directors of WorldCom, who shelled out $18 million, and Enron's outside directors, who coughed up $13 million, were not insurable, the defense costs incurred by innocent parties would have been. Insurance protection was not available to these individuals due to depletion of the limits from partial settlements, defense for the "bad actors" and corporate liability protection.

These landmark cases have heightened attention to directors' and officers' liability insurance, as well as a lesser-known coverage called Side-A, the non-indemnifiable loss component to the directors and officers contract. Side-A coverage typically kicks in when a company cannot indemnify directors or officers for claims, such is typically the case during insolvency or financial impairment.

With the enactment of the Private Securities Litigation Reform Act of 1995, requiring the appointment of lead counsel, the plaintiff's bar has devised new ways to represent clients in large securities cases. These new legal strategies include filing parallel proceedings to security cases, including ERISA suits, derivative suits and opt-out cases targeting other large institutional investors. This trend has increased the awareness of personal liability that outside directors face when sitting on the board or executive committee of a publicly traded company.

The opening for plaintiffs' attorneys has been widened, and the search for new ways to generate revenue from publicly traded organizations will continue. As such, directors and officers should strongly consider the need for higher executive risk limits and Side-A options as part of their pre-renewal strategy.

If you have any questions regarding the directors and officers liability market, coverage considerations or Side-A products, contact a Hylant Executive Risk specialist.

Jim.Lash@hylant.com | 513-354-1611

Grand Rapids, MI—Hylant Group announces its newest office opening in Grand Rapids, strengthening its services and expanding its presence in Michigan. Hylant Group—Grand Rapids highlights its ability to provide national expertise with the responsiveness of a regional brokerage. The new office will be dedicated to providing insurance and employee benefit services to Grand Rapids and the surrounding areas.

Mark Miller, regional vice president — Michigan and the president of Hylant Group’s Ann Arbor office, said, “Grand Rapids has long been a marketplace Hylant Group has coveted to continue our aggressive growth strategy. We are very excited about the potential of the western Michigan marketplace and thrilled that Len will be leading our presence in Grand Rapids."

Read the full press release »»

Basima Rumman | Property Specialist
Rumman will serve as vice president based in Hylant’s Troy, Mich., office. Previously, Rumman was a 25-year veteran and vice president with Marsh McLennan Cos., Inc, where she handled some of the largest multinational property accounts in the world. She has designed, developed and implemented a wide variety of risk management programs, while establishing market relationships and carrier knowledge that places her in the industry’s top tier. Rumman will continue the same work with Hylant’s Large Account Practice, focusing on international property coverage for Fortune 1000 firms.

Jim Chapman | Surety Specialist
Jim Chapman joins Hylant's Large Account Practice as a client executive/vice president and Commercial and Contract Surety practice leader. Chapman has over 30 years experience in underwriting, agency production and contract and commercial bonds. He was most recently director and branch manager for CNA Surety for the State of Ohio based in Columbus, Ohio, and for the prior 2 years worked for Marsh USA in Cleveland, Ohio, where he was vice president and Surety practice leader. Prior to Marsh, he worked for Atlantic Mutual Companies where he was the Surety branch manager.