What ramifications of last year's Sarbannes-Oxley federal legislation are being felt here in Wisconsin? According to Art Josetti, account executive of HNI Risk Services, New Berlin, it's still early to come up with a definitive answer to that question. Everyone is unsure about how it's going to shake out, he says, but there are some indications of what is starting to happen.
The new law, prompted by the infamous corporate behavior that occurred in such companies as Enron, WorldCom and Arthur Anderson, made it clear that such behavior won't be tolerated. It mandates that high executives in publicly held corporations guarantee the financial information that their companies disseminate.
"Given the current business environment, shareholders and individuals are more inclined to sue directors and officers of corporations. So there's been a heightened awareness of the importance of directors and officers insurance (D&O) and professional liability insurance coverages.
"We don't have a lot of public corporations headquartered in Wisconsin, but privately held companies have liability exposures too," he says.
"Carriers that write D&O policies are seeing increased claim activity," Josetti added. "Not only that, these claims are more difficult to settle than general liability or product liability claims. It's a little more costly for a carrier to handle a D&O case than it is for a general or auto liability case. As a result of that, they have to pass the cost on to the policyholders. There's a small segment of the legal profession that's good at handling them, and their fees tend to be a bit more costly, too."
"Everybody who owns a company should have D&O liability insurance," says Karen Rechlitz, vice president of Fitzgerald, Clayton, James and Kasten in Mequon. "If you buy it now, the rates - although increasing - are still competitive. But don't wait until next year when the rates will be higher."
In the last eight months, however, Rechlitz hasn't seen an increase in D&O business. "The reason, in my opinion, is that insurance for all other lines is incredibly expensive and people believe that D&O insurance is a luxury item. But it really isn't," she says.
Rick Kalscheuer agrees. "It's important that business owners protect their companies from general liability losses, from losses from fires and automobile accidents. But they also need to protect themselves from claims that can be made against them for decisions they make in running their businesses. Claims can be made against them by banks, employees, family shareholders, competitors, customers or vendors," says Kalscheuer, account executive for R&R Insurance Services in Waukesha.
Rechlitz has seen increases in defense costs, rates and claims. "Especially in defense costs," she emphasizes. "That's true because of tort reforms in many states in the USA."
Josetti says rate increases he has seen are in the 5% to 10% range. "That's better than last year, but rates are still rising. Our insured don't want to have to pay more, and we don't want them to pay more. To mitigate that, people are taking higher self-insured deductibles and looking at lower limit options if those increases are too great. But the bigger approach to mitigate is to go to higher deductibles.
"It's tougher to get a handle on professional liability insurance," he says. "There are so many different types of exposures for professionals, running the gambit from the medical to legal to accounting and to engineering professionals. That insurance is very specialized, and a lot of it is placed through associations. I know, from talking to underwriters, that those rates are still tracking upwards. They're seeing more claims and wanting to increase rates because of that.
"In addition to higher deductibles and lower limit options, make sure that you employ loss control techniques such as documenting everything and having written procedures in place," he advises. "Make sure you explain things fully to everyone involved in the decision making process. Don't whitewash things that could cause a minority owner to feel that he or she was left out of decisions. And talk to your legal advisors about how to conduct meetings and how to run your business properly."
Patrick Kelly, vice president and professional liability practice leader of Johnson Insurance Services in Madison, says companies buying D&O insurance from his company are doing so because they are high-tech organizations that tend to have venture capital and want to have representatives of those venture capital companies or lending institutions sitting on their boards.
"Those people demand that you have D&O insurance," he says. "They also buy that insurance because they want employment practices liability insurance (EPLI) coverage, which is a main coverage grant in a typical D&O policy for a privately held company."
Kelly says almost all of their privately held company clients pay premiums in the $5,000 to $20,000 range. "The premiums for that insurance are largely driven by their employment liability exposure.
"Most of these companies used to buy their D&O coverage separately from their EPLI coverage, but now I see a significant trend where insurance companies are selling executive protection policies, which are like an ala carte policy. You can choose from D&O, EPLI, fiduciary liability, or some kidnap and ransom crime coverages listed on their menus."
Another trend Kelly sees is stabilizing prices for this insurance coverage. "I haven't seen any significant increases. We heard all those horror stories about the state of chaos that D&O insurance is in, but that's mainly with publicly held companies. The majority of our renewals have experienced increases of less than 10%. That's because privately held companies are still seen as relatively good risks for insurance companies."
Kelly has also seen underwriting tighten up. "There's always been concern about whether insurance applicants have the financial stability to make it from one year to the next. That's more of a concern today. Insurers want to see a company's financials."
April 2, 2004 Small Business Times, Milwaukee