Mitrovic Mic’d Up D&O Claims Exec Sounds Off

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journalManagement LiabilityADVISEN

December 2011

17 December 2011

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Ironshore’s D&O Claims Leader Mike Mitrovic sounds off on soft primary claims-handling practic-es and escalating battles between primary and ex-cess insurers.

Advisen Spotlight

When it comes to directors and officers liability insurance claims, Mike Mitrovic has seen it all. Mike, currently the President of Global Claims for Ironshore, spent 22 years with AIG where he was Vice President of claims for American International Group and President of AIG Worldwide Financial Lines Claims. He also co-founded Global Specialty Risk, a D&O insurance platform launched in 2000, and served as its President and Chief Operating Officer.

Advisen MLj’s editor-in-chief, Dave Bradford, caught up with Mike at Ironshore’s New York offices.

DB. A soft market typically is defined in pricing and underwriting terms, but you are seeing soft market conditions affecting the claims side of the business as well.

MM. Definitely. In a soft market, when there is pressure on rates, that same pressure is felt throughout the organization. An organization wants to retain the relationships they built with clients. That includes not only pricing, but also how claims are managed.

Primary markets sometimes can be excessively flexible in handling a claim in a soft market. Because it is their intent to retain the business, claims may be paid faster and in larger amounts. That could impact the relationship between the primary insurer and the excess insurance markets because the excess insurers typically have chosen to participate based on the form the primary market has issued, and they follow that form.

D&O claims exec sees growing friction between primary and excess markets

By David Bradford

mitrovicmic’d up

18 December 2011

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Primary markets sometimes can be excessively flexible in han-dling a claim in a soft market.

DB. So if the primary insurer is making claims decisions with the goal of re-taining a relationship, that affects the position of the excess insurers as well.

MM. That’s right. When a claim is reported, the excess insurers will await the coverage position taken by the primary market with the belief the primary market will raise any and all coverage issues that will impact the coverage or the value of the claim.

What you find in the soft market is that the primary insurer is much more malleable—much more flexible—and inclined to pay faster and in larger amounts than they otherwise would in a hard market. And if they have chosen to ignore some coverage issues that should have been raised, it can have a substantial impact on the excess markets.

This can cause friction between the excess markets and the primary mar-kets. It can also create tensions between the excess markets and the insured because, if the excess markets raise the coverage issues, the insured will come back and say “Hey! The primary insurer committed to pay their policy limit, and now you’re telling me this isn’t covered. You follow the same form. They’re the ones that underwrote this on a primary basis, and you chose to follow it. They’re saying it’s covered. They’re paying the claim.”

DB. How is this situation impacting the relationship between primary and excess insurers?

MM. I think there is a certain level of mistrust that has grown out of these market conditions. Where it is obvious that a claim is being paid for a mat-ter that is arguably not covered, the excess insurers are very interested in knowing what the terms are that were negotiated on an account basis going forward. I think the excess markets believe those same terms should be trans-parent to them and should also be quoted to them.

DB. So the excess markets feel they are losing out in these situations.

MM. Yes, but there is a flip side to this coin too. Some claims are covered and simply need to be paid, but there are excess markets that quoted the business with the belief that losses would never reach their layer. In some cases where the liability seems pretty clear, and there are no coverage exclu-sions that would seem to apply, you find excess insurers that become very creative with positions they take to argue that coverage isn’t as clear as the insured thinks.

19 December 2011

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Advisen Spotlight

Some claims simply need to be paid, [but] there are excess markets that quoted the busi-ness with the belief that losses would never reach their layer.

I think in some cases it is a matter of the survival for excess insurers that recognize that one loss could be greater than the total amount of discounted premium they have collected. So in an effort to preserve profitability, you’ll find these creative exercises in which novel ideas of how the policy does or doesn’t respond to a reported claim are introduced. If these disputes aren’t worked out, they often are litigated in court or in front of an arbitration panel. You get decisions handed down that, in some cases, should be no surprise to the insurance market.

DB. Bad cases make for bad law. A decision comes down that adversely affects everybody because someone took an indefensible position to begin with.

MM. That’s right. But you know, Dave, there are also cases where the position may be good, but you’re in front of the wrong judge or in the wrong jurisdic-tion. You have a sense that the outcome will be adverse to you even though you have a good position. So don’t take that all the way. Don’t create bad law that is going to have adverse consequences.

DB. It seems to me that, in years gone by, there was more cooperation among insurers in settling a large claim—much more of a collegial atmo-sphere. Now the process seems more adversarial.

MM. I think you’re right, Dave. I don’t think it is as collegial as it used to be, and I think there is a lot of mistrust between markets which makes it more difficult to put together a settlement of a case involving a tower of insurance. Qualcomm-type decisions make it tough to get a tower of insurance and all its participants to view a matter through the same eyes.

DB. What is a Qualcomm-type decision?

MM. Qualcomm (Qualcomm v. Lloyd’s, decided in March 2008) was a Cali-fornia (Court of Appeal) decision concerning the wording of an excess policy that requires exhaustion of the underlying policy before the payment obli-gation of the excess is triggered. If you have a situation where a discount was given to a couple of insurers to get them to commit to a settlement, an excess insurer can make the argument that that discount prohibits full exhaus-tion of the underlying layers, and consequently the excess insurer has no obligation to pay.

There have been some state decisions that support that position, and that makes it harder to get cases settled. Primary insurers who think they have a

20 December 2011

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In some cases, you find excess insurers that be-come very cre-ative with posi-tions they take.It is a matter of the survival [when they] recognize that one loss could be greater than the total amount of dis-counted premium they have col-lected.

good coverage position, and who would like to get a discount off their limits to get things resolved, are going to find it increasingly difficult to negotiate that discount because the insured runs the risk of not being able to collect from the excess markets.

DB. I hear a lot of talk about expense costs spiraling out of control.

MM. It’s a big issue. The firms that are typically retained to defend large secu-rities claims— which have the experience defending these types of claims—charge large hourly fees. It is probably more common than not for partners handling these kinds of cases to be charging $1,000 an hour.

The D&O policy was drafted to create a partnership between the insurer and the insured with much discretion given to the insured on the choice of coun-sel and how the litigation is to be managed. Not surprisingly, this has resulted in cases that generate large amounts of fees. It’s very difficult for an insurer in bet-your-company litigation to argue that it was too costly because, from the company perspective, they don’t want any corners cut, and they believe they are entitled of the best efforts of their counsel.

And then there is the issue of e-discovery. When I grew up in this business people used to pick up the telephone and they used to talk. Now everything is done by e-mail. That’s the primary means of communication. In e-discovery you have tremendous amounts of lawyer time being put into document review to figure out which communications are privileged, and which aren’t. It requires a lot of man-hours, and that’s where these fees really begin to pile up.

DB. But then you have the possibility of exhausting the policy limits with de-fense costs and having nothing left for a settlement.

MM. Clearly it is the responsibility of the insurer to make sure the insured un-derstands that the policy is self-eroding, and that expenses diminish the limit.

DB. I sometimes hear of a primary insurer tendering its limits and walking away, and suddenly the first excess carrier is managing the defense. Is that situation common?

MM. That is happening a lot today. Once again, that is part of the changing dynamic between primary and excess that we were talking about.

DB. I would imagine that many excess insurers are not really equipped to handle the details of these claims.

21 December 2011

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Advisen Spotlight

“It is probably more common than not for law firm partners handling these kinds of cases to be charg-ing $1,000 an hour,” Mitrovic says.

MM. That’s a good point, Dave, and that’s a dilemma some insurers face to-day. There are excess insurers that don’t have the resources or the expertise that would allow them to take on the responsibilities that one would associate with things that a primary market does on a daily basis.

DB. Regulators and law enforcement agencies are other sources of high expenses. An investigation will start the meter running. Is a more active SEC going to drive up the cost of these claims?

MM. There is a lot more regulatory enforcement and scrutiny, and it not only drives up the cost, but it also makes the claims resolution process more chal-lenging.

Regulators often have the benefit of very expansive authority. The Office of the State Attorney General of New York under the Martin Act, for example, can subpoena almost anything they want to subpoena, and a company has to turn it over. That can require a tremendous number of man-hours.

Many times these investigations are covered under a D&O policy. Policy terms have become extremely expansive, and some policies go so far as to provide coverage for informal investigations. If there is an informal request for information or for questioning, if legal services are retained by the insured to respond to that request, the cost associated with that can be put through to the D&O insurer if coverage is provided for informal investigations.

DB. An investigation also might trigger a securities suit.

MM. True. Civil claimants could bring a securities claim alleging the investiga-tion wasn’t disclosed, or that the matters being investigated weren’t disclosed and the market reacted adversely to that news. Those civil claimants can just sit in the background and wait for the regulatory authorities to bring their ac-tions and then get the benefit of the discovery by the attorney general or the SEC.

DB. I know you are not a fan of entity coverage under the standard ABC D&O policy.

MM. The market moved into giving entity coverage, but we’ve never priced for it. I don’t think it is possible to make a profit writing an ABC policy that provides entity cover for securities claims. Consequently, I think you will see more A-side policies, or there has to be a pricing adjustment for ABC cover-age. n