The CPA Journal

Directors and Officers Insurance Update

By Philip Zimmerman, CPA

A recent program sponsored by the Association of the Bar of the City of New York (ABCNY) focused on “Directors & Officers (D&O) Insurance in the Age of Enron.”

Effect of Enron on the liability insurance market. Evan Shapiro of Peterson & Ross said that various reports estimate Enron’s collapse will cost insurance companies between $2 billion and $3.5 billion. Many of these losses involved primary and excess insurers that also insure CPAs and attorneys against professional liability risks. As a result, CPAs can expect their own insurance costs to rise. In addition, insurance companies may increase their deductibles and establish new requirements for retention and limitations on coverage.

Know your insurance policy. According to Paul C. Rowe, claims counsel of Kempner Financial Insurance Solutions, insureds need to know the terms of their policies because, “I will allow what the policy covers and nothing beyond that.” Also important to know is whether a policy is a term policy, which allows certain claims made for acts during the term of the policy (as most D&O policies are written), or a claims made policy, which allows certain claims made during the term of the policy (as most CPA professional liability policies are).

When insureds assess their coverage needs, they should determine whether defense costs are included in the coverage or separately covered by their policy. If defense costs are separately covered, the coverage is not diminished by damage awards or settlements. Most insurers of CPAs charge all defense costs against the face of the policy.

Andre E. Harlfinger, vice president of Marsh FINPRO, advised that, when obtaining adequate coverage at a reasonable price is difficult and the prospective insurer wants to know more about the insured’s risk management, “the broker will play a more significant role than ever in facilitating this exchange of information between Insured and Insurer and helping to forge a relationship of trust and confidence.”

Mitigation of damages. Insurance industry experts and attorneys attending the seminar uniformly stressed the importance of keeping current and former employees from becoming disgruntled in order to reduce claims. According to Scott R. Schaffer, of Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, in public corporations more than half of the claims involve an employee or former employee. Because all employers are subject to rapidly increasing employment-related claims, Schaffer outlined a proactive program that includes preparing a fair employment practices policy, then publicizing, enforcing, and educating all supervisors and employees about it.

The insurance industry climate has changed from a “soft market” into a “hard market.” Because such markets generally last for several years, CPAs should familiarize themselves with their insurance coverage in order to keep costs reasonable and to prevent it from once again becoming a major overhead item.

Philip Zimmerman, CPA, is editor of The CPA Journal “CPA in Mediation and Arbitration” department. He can be reached at www.mediatorpz.com.