Negotiate the Best Directors & Officers Liability Contract for Your Board

November 26th, 2014

11-26-14-AHT.jpgThe bank’s directors & officers (D&O) policy is there to protect the personal assets of the individual directors and officers. In dire cases, it very well could be the last line of defense to ensure that individuals do not have to pay out of pocket after a lawsuit or regulatory fine. With that context, having an organized renewal process can ensure the best results. Here is our recommended step-by-step timeline to ensure the most comprehensive placement.

90 – 120 Days in Advance of the D&O Renewal: Renewal Strategy
Typically, the chief financial officer or in-house attorney would be responsible for the renewal discussions. The renewal strategy discussion with a broker could:

  • Review any recent successes or challenges at the bank that may have arisen since the last renewal and discuss what impact those may have on the renewal.
  • Analyze any recent claims and litigation trends that are impacting other bank boards as well as any changes in carrier appetite, any new carriers in the market, new language grants and pricing trends.
  • Update the limits benchmarking analysis and review the current limits sharing structure to ensure it is appropriate for a bank based on the asset size and risk analysis.
  • Determine a marketing strategy. Our advice is to market the D&O insurance at least every other renewal cycle and if you are on a three-year policy term, every cycle.

60 – 90 Days in Advance of the D&O Renewal: Insurance Application

  • If you are not sure of an answer to a specific question, it is always better to leave it blank rather than guess.
  • If a question can be answered by a document that is publicly available, simply answer, “see public filings.” This way, when you are completing the same renewal application the following year, that field can remain as is.
  • Likewise, if the answer to a question requires more than a handful of words, it is always OK to respond, “see attached.” This way, at the following renewal, all you need do is update the attachment.

45 – 60 Days in Advance of the D&O Renewal: D&O Underwriter Meeting
The next step is to give the underwriters an opportunity to learn more about the bank other than from the insurance applications and the public filings. This is accomplished via the D&O underwriter meeting/call. The call leader is usually the chief executive officer or chief financial officer, but could include counsel or the chairman of the board as well. The process for this meeting is to collect all of the underwriters (including the incumbent) into either one location or one call. Having the incumbents on the call with competitors will let the incumbents know they are going to have to sharpen their pencils to keep the business. There are other benefits as well:

  • You can allow underwriters to hear from the bank executive(s) directly, the best advocates of the bank.
  • The call gives executives the chance to answer verbally instead of in writing.
  • You can express the importance of everyone’s time on the call, so underwriters should get the message that they should speak now or forever hold their peace. We typically find that this really streamlines the process from call to quote to bind.

Note that the process includes collecting all underwriter questions in advance of the call and providing these to the executive team several days prior to the call, so they have an understanding of what types of questions may get asked.

20-30 Days Prior to Renewal: Taking Bids
After the meeting, all that is left is to do is collect, compare and summarize the different quotations. Note that most underwriters will typically not offer a quote more than a month in advance of the renewal, so expect 20-30 days prior to renewal to start hearing about the different coverage improvements and recommendations. Because of all of the ground work already done, this part is typically the easiest, as the whole process normally has come to a positive end. Of course, the audit committee, or in most cases, the full board will want to hear the recommendations and make a final decision.

dgustafson

Dennis Gustafson is the Financial Institutions Practice leader of AHT Insurance, a national, independent brokerage house that has been servicing their clients since 1921.