Looking Ahead 2018

Insurance Services | Risk Management | Employee Benefits

Looking Ahead 2018 D&O Considerations for the Next Calendar Year

UPDATED Q3 2017

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Looking Ahead 2018 | ©Woodruff-Sawyer & Co.

Table of Contents 1. D&O Market Update........................................................................................2 2. Underwriters Weigh In................................................................................. 10 3. Hot Topics.......................................................................................................16 4. Expert Insights...............................................................................................21 5. Concluding Perspective.............................................................................. 30 6. About WS&Co. ..............................................................................................32

Click/tap the name of one of our experts below and see what advice they have for you as you plan for 2018.

Norman

Carolyn

Dan

Lauri

Renewal Pricing

Property and Casualty

Private Equity and Venture Capital

Cyber

Megan

Jared

Emily

Priya

International

Unicorns

Reps and Warranties

Claims

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1.

2

D&O Market Update

Looking Ahead 2018 | ©Woodruff-Sawyer & Co.

1.1 US Markets The US Directors and Officers Liability Insurance market continues to favor insureds. We expect this advantage to persist in 2018.

An ample supply of capital relative to demand means that most mature public companies have seen favorable year-overyear pricing. This is true notwithstanding the fact that in 2017 several of the larger market share insurance carriers have attempted to increase premium across their portfolios. These carriers argue that their market share allows them to see claims trends that smaller competitors have not observed: that carriers—and primary carriers in particular—are losing money. In some instances, where a non-incumbent carrier has competed aggressively on price on a renewal, the incumbent has refused to match the competition, instead choosing to walk away. In other instances the competition has led to more favorable pricing, with the incumbent staying on the program. Each renewal presents its own unique dynamics.

For most public companies, renewal pricing outcomes can be divided into two categories: the primary layer of the program; and, the excess and Side A layers of the program. Since fewer carriers have the appetite to write the primary layer of a D&O tower, pricing for the primary layer

has held firmer. This is especially true for those companies that carriers regard as having particular markers for risk: larger market caps, challenging industries, existing or likely litigation, financial woes and other similar factors.

Having said that, overall, most companies have seen primary layers renew at pricing that is flat to slightly up. In some instances, premium decreases can still be achieved.

Meanwhile, fierce competition for the excess layers of a tower—including the Side A layers—can often result in a yearover-year decrease in the total program premium. Incumbent carriers face the dilemma of losing their place on a tower if they are unwilling to match a competitor’s offer for lower pricing. While some carriers on excess layers have walked away from these layers in 2017, the vast majority of the time the incumbent yields to market pressure in order to stay on the program.

As a result, many insureds have seen total program cost go down, even if the primary layer is flat to modestly up in price.

As in past years, companies that are newly public will pay more for D&O insurance in 2018. Fewer carriers are willing to write the primary and lower layers of insurance for IPO companies.

Carriers that are willing to write these layers charge more for a number of reasons, including the fact that (1) newly 3

public companies face higher claims frequency for at least the first three years after their debut, and (2) the trend for the plaintiffs’ bar to bring suit in state court for violations of Section 11 of the Securities Act of 1933.

This latter situation may be mitigated— and it’s worth trying—through the use of federal choice of forum provisions.

Supply also remains more limited for life science companies, especially those in or nearing Phase III clinical trials, which results in higher pricing for these companies. A limited number of carriers are willing to participate in the primary or lower excess layers of the D&O tower.

They view these companies as having a higher frequency of class action litigation, although some data suggest the dismissal rate for suits brought against life science companies is higher than other industries.

In the end, it remains true that companies that take the time to differentiate themselves and their risk profiles from those of their peers achieve the most favorable outcomes. Expert brokers like those found at Woodruff-Sawyer, professionals who can bring to bear years of experience working with fast-growing public and large private companies, help their clients do exactly this.

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1.2 Brexit More than a year has passed since the British electorate’s vote to exit the European Union (EU) on June 23, 2016.

The financial markets have recovered from the post-vote free fall, but uncertainty surrounding the ultimate global financial impact remains primarily due to the bureaucratic complexity of Brexit.

The wheels for Brexit are now in motion: on March 29, 2017 the UK triggered Article 50 of the Lisbon Treaty which governs a country’s exit from the EU. Once a country triggers Article 50, it has two years to reach an agreement on the terms of exit with the EU. This does not necessarily mean that the UK will actually exit the EU on March 29, 2019. No country has ever exited the EU before so these are unchartered waters. Even if the UK and the EU reach mutually acceptable exit terms in the next two years, the terms still need to be approved by 27 national parliaments. Article 50 does allow for extensions and that is likely to happen— in short, this could take years. No one can predict the outcome of the Brexit negotiations at this time, but it is possible to consider the factors that may impact insurance policyholders.

Looking Ahead 2018 | ©Woodruff-Sawyer & Co.

Will my insurer be downgraded?

It is unlikely that any insurer will face a solvency problem based on the Brexit.

The insurance industry both in the United States and Europe has abundant capital.

This capital is an insurer’s buffer to pay losses. Britain’s extrication from the EU is not an event that would lead to increased insurance losses.

UK-based insurers may face challenges if they are paying claims in local currency in countries where the pound has weakened against the local currency—that is just about everywhere. Lloyd’s of London, by far the largest UK insurer, holds more than 50% of its funds to pay claims in US dollars so the currency impact to the Lloyd’s market is mitigated. The most likely impact on insurers will be increased costs if they opt to move their current London headquarters to continental Europe. This is a real possibility if UKbased insurers lose “passporting” rights.

What is passporting?

Passporting is the right to provide business services on a cross-border basis within the European Economic Area (EEA). It is also known as Freedom of Services (FOS). This has become an important provision for many US insurance buyers because it allows a buyer to purchase an insurance policy in the London market that will be admitted

from a regulatory standpoint—i.e. can be used in all EEA countries.

Some clarity is emerging around passporting. In a speech delivered on January 17, 2017, UK Prime Minister Theresa May outlined the UK government’s objectives in negotiating the Brexit. In this speech May stated the UK government would not seek to retain full membership in the EEA. No one can predict the final outcome of the negotiations but if the UK does not retain membership in the EEA passporting rights will be lost. Insurers have already reacted. Lloyd’s of London announced that its EEA hub will be in Brussels and AIG will base its EEA business in Luxembourg.

For policyholders with a FOS policy purchased in the London market, do not panic. Your FOS policy is still in force and valid and there is no need to make an immediate change. Insurers are fighting for market share globally; there is no way they are going to put that market share at risk. If there is no change in the outlook for passporting rights, we would expect UK insurers to start migrating FOS policies to their EEA hubs on continental Europe in late 2018. Any UK exposure would then be covered by a separate policy issued in the UK.

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Will my insurance premiums increase?

If insurance premiums increase, it will not be because of the Brexit. While UK-based insurers might attempt to raise premiums to offset their increased costs, they will be heavily constrained by the global nature of capital availability in the insurance market. Insurance is still a supply and demand business. Demand by insureds is somewhat constant, but supply is the capital in the industry. It has been the case for many years that there is an abundance of capital in the insurance markets. From time to time we see a decrease in capital due to losses suffered by carriers from things like major natural catastrophes in developed and expensive locations.

Barring this kind of calamitous event on a scale that would lead to a drastic decrease in capital, we don’t expect significant premium increases any time soon.

stabilized in 2016 and 2017. If a company experiences a significant increase in market capitalization in advance of its 2018 renewal, we anticipate that most primary carriers will want to both increase the company’s retention and achieve a small premium increase at renewal.

1.4 Pricing Trends (CIAB) Commercial property/casualty (P/C) rates continued to decline for the tenth straight quarter, according to The Council of Insurance Agents & Brokers’ Commercial P/C Market Survey. Other lines such as D&O liability, employment practices and surety bonds are included in this survey and experienced slight increases of 0.2% or less. During Q2 of 2017, all three lines experienced rate declines to some extent.

2%

As of this writing, both the US and Asia have experienced massive flood disasters.

It is too soon to tell if those events will constrain the capital available in the D&O insurance market, but early assessments suggest that the answer is no.

1.3 Retention Trends After trending upwards over the last several years, self-insured retentions

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10%

22%

Renewal Rates: Decrease 1%-10% Flat

21%

Increase 1%-10% Increase 10%-20%

45%

Not Specified

Source: The Council of Insurance Agents & Brokers, “Commercial Property - Casualty Market Survey” (August 2017)

Read the CIAB Report > Looking Ahead 2018 | ©Woodruff-Sawyer & Co.

1.5 Woodruff-Sawyer Client Renewal Pricing Overall pricing trends among Woodruff-Sawyer renewals in 2017 show continued decreases; it’s not clear that this trend will hold. For this analysis, we looked at the year-over-year change in premium for companies’ entire program (as opposed to only analyzing the first or primary layer of insurance). This analysis only includes companies that purchased the same limits in 2016 and 2017. It should be noted that over half of the companies in our sample are life science companies, technology companies, and recent IPOs—all categories that price at the higher end of the spectrum.

53% of Companies: Decreased Premiums »» 53% of clients experienced a decrease in total premium »» The average decrease was 8% »» 24% of clients had a decrease greater than 10% »» 15% of clients achieved their decrease by changing carriers

16% of Companies: Flat Renewal Premiums »» 16% of clients experienced a flat renewal »» Only one of these clients obtained a flat rate by increasing their securities retention

31% of Companies: Increased Premiums »» 31% of clients experienced an increase in total premium »» The average premium increase was 13% »» The average increase in premium drops to 10% if the largest three increases are dropped from the data set »» Most of the companies that experienced increases are life science, technology or recent IPO companies

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1.6 Coverage Issues We’ve been in a very friendly market when it comes to terms and conditions in D&O insurance policies. At this point in the cycle, a lot of the give-and-take of policy evolution is either a discussion about additional coverage for additional premium (e.g. investigation coverage for a corporate entity) or more marginal issues. These “marginal” issues can be quite important, but they do tend to be highly technical in nature.

One material area of focus more recently has been what happens to a D&O insurance policy when a company is acquired. This is no surprise given the significant merger and acquisition (M&A) activity we’ve seen in the United States in recent years. While we’ve seen the rate of M&A slow somewhat in 2017, the activity is still significant.

Directors and officers of the selling company—and particularly those departing at the time the sale closes— have a keen interest in seeing that they will be protected by a D&O run-off (or “tail”) policy, since that policy is the source of insurance coverage for any wrongful acts alleged to have occurred prior to the close. (The buyer’s policy picks up coverage for wrongful acts after the close.) A six-year tail policy, purchased by

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the selling company prior to the close of the transaction, is standard for US public M&A transactions. To the extent the selling company has traditional ABC style insurance, that run-off policy becomes valuable not only to the former directors and officers, but also to the buyer who has assumed the liabilities of the seller and the obligation to indemnify its directors and officers. Thus, the run-off policy provides personal protection for the selling company’s natural persons and balance sheet protection for the buyer.

In most respects, the coverage terms of a run-off policy are standard and have not changed for some time. Two items, however, have gained increased attention in recent years. The first item is the socalled “successor in interest” coverage.

This amendment to the policy is most frequently requested by the buyer, who wants to make sure that once it has stepped into the seller’s shoes it will have all the same rights under the policy for Side B and Side C claims.

While such a change to the policy is likely not essential in most policy forms, there is no harm in adding the coverage so long as certain aspects of the language are carefully monitored. For the departing directors and officers, it is important that they have insurance protection should a claim be brought against them by the buyer, for instance alleging they Looking Ahead 2018 | ©Woodruff-Sawyer & Co.

made a misrepresentation in the sale of the company. “Successor in interest language” applied too bluntly can be problematic because ABC style D&O insurance policies contain an exclusion for claims brought by the Company against an insured person, known as the “Entity versus Insured” exclusion. (See text box below.) Thus it is important that the successor in interest not be deemed “the corporate entity” for purposes of this exclusion. Careful review of the language is appropriate to ensure that a claim by the buyer has not inadvertently been excluded from coverage.

The second issue that has recently been the subject of a lot of discussion is the addition of so-called “straddling language.” This language amends the

D&O policy to further clarify that any future claim that alleges wrongful acts perpetrated by the selling directors and officers and occurring both before and after the transaction close date—that is, a claim that straddles the closing date—will be deemed to be covered by the seller’s run-off D&O policy, not the buyer’s go-forward coverage. Without this amendment, the run-off policy would be responsible for covering pre-close wrongful acts and the go-forward policy would be responsible for post-close wrongful acts. Allocating between these two policies requires additional work and negotiation. When a straddling endorsement is added to the run-off policy, it specifies that the run-off policy picks up both pre- and post-close wrongful acts.

Historically, D&O policies contained an Insured versus Insured exclusion that broadly excluded claims brought by one insured against another. In some sectors, the forms still operate this way. On the other hand, most public company D&O forms today have limited that exclusion to apply only to claims brought by the company against another insured (a/k/a an “Entity versus Insured” exclusion).

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2.

10

Underwriters Weigh In

Looking Ahead 2018 | ©Woodruff-Sawyer & Co.

Good brokers are advocates for their clients. Good brokers also have the ability to listen to their insurance carrier partners and understand their view of the world, including their current appetite for risk. Woodruff-Sawyer is in conversation with all the major insurance carriers every day.

For this section of Looking Ahead, we surveyed 31 insurance carriers with whom we place D&O insurance around the world. We asked questions in three categories: (1) the current risk environment; (2) risk appetite; and (3) future pricing expectations.

Our survey includes responses from top D&O carriers including: AIG, XL Catlin, Chubb, Lloyd’s, Tokio Marine HCC, Old Republic and Great American.

2.1 The Current Risk Environment Q.

Is D&O risk going up?

88.5%

11.5%

0%

Increasing

Same

Decreasing

A. While a few carriers see the world in stable terms, most think the risks to directors

and officers—and by extension to the policies they sell to insurance buyers—are increasing. Despite the prevalence of this view, the abundance of capital in the insurance market continues to keep premiums down other than in certain pockets of risks, for example IPOs.

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Q. Is the governmental regulatory environment getting more or less

difficult for public companies and their Ds and Os?

60%

24%

16%

More

Same

Less

A. The responses were more nuanced here, with a few underwriters even saying that

they think the regulatory risk is going down. These happy optimists were, however, in the minority.

Q. Are companies as aware as they should be about the risk and cost of

D&O litigation?

32%

68%

Yes

No

A. Carrier responses to this question could be viewed, perhaps, as insulting to D&O

insurance buyers. Another, more charitable, possibility is that the data reflects carriers’ understanding that most buyers can’t imagine how serious the risks and costs of D&Orelated litigation might be due to a lack of experience . . . or a lack of pain since D&O insurance is actually designed to mitigate an insurance buyer’s financial pain.

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Looking Ahead 2018 | ©Woodruff-Sawyer & Co.

Q. Who is the most critical person at a company when you think about

mitigating D&O risk?

32%

32%

20%

16%

CEO

CFO

General Counsel

Board

A. The surprise here is that most carriers do not regard the General Counsel as most

critical. This presents a real opportunity for very good General Counsels to help insurance carriers understand the steps they are taking to mitigate the risk of D&O litigation.

2.2 Risk Appetite Q.

Will you quote the primary layer for most public companies?

56%

44%

Yes

No

A. Year one of this question isn’t that interesting; different markets have different

appetites. What will be interesting is how these percentages may change over time.

Check out Looking Ahead 2019 for more on this topic!

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Q. Will you quote the excess layers for most public companies?

92%

8%

Yes

No

A. The yes votes are not surprising. One wonders if the no votes hit the wrong button?

Q. Will you quote stand-alone Side A for most public companies,

assuming a stable balance sheet?

100%

0%

Yes

No

A. Pretty much the complete explanation for the pricing we see for stand-alone Side A,

especially when it comes to higher layers.

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Looking Ahead 2018 | ŠWoodruff-Sawyer & Co.

2.3 Future Pricing Expectations Q. Industry-wide, do you expect D&O insurance premium rates for

mature public companies to go up, stay the same, or go down?

28%

48%

24%

Go Up

Stay the Same

Go Down

A. The ones who voted for “go up” might be engaged in wishful thinking given the

abundance of capital in the market. Then again, the “go up” vote is consistent with the world-view that risk is going up (see the first question in this section).

Q. Industry-wide, do you expect D&O self-insured retentions for mature

public companies to go up, stay the same or go down?

32%

68%

0%

Go Up

Stay the Same

Go Down

A. This is consistent with the one-way ratchet we’ve experienced over the years when

it comes to self-insured retentions. Notice the overlap between the carriers who think premiums will go up and carriers who think self-insured retentions will go up.

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3.

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Hot Topics

Looking Ahead 2018 | ©Woodruff-Sawyer & Co.

3.1 Securities Class Action Suits Securities class action suits remain a high severity risk for public company directors and officers. For this reason it is not great news that the frequency rate for these types of suits is currently trending at a relatively high rate and shows no signs of abating.

2016 gave us a 10-year high; per the D&O DataBox, 2017 is on track to exceed 2016.

Why? Market volatility is certainly one factor. Another factor is the prevalence of IPO companies whose stock prices first rose and then fell dramatically. As always, dramatic drops in a company’s stock price often lead to a securities class action lawsuit.

Federal Securities Class Action Lawsuits

Federal Securities Class Action Lawsuits

Subprime/Credit

Classic

Stock Option Dating

China HQ’d

180 145

Number of Cases

159

# of US Companies

% Sued

2007

2008

140

10-Year Trend 

108

106

2009

2010

128

2011

2012

135

2013

195

153 126

2014

2015

2016

2Q 2017

4.0% 2.7

%

5,965

2.8

2.6%

5,472

2.1%

2.1%

5,179

5,017

%

4,900

2.6%

4,943

2.8

%

3.0%

4,909

5,139

3.6

%

5,014

4,863

Note: Data current as of June 30, 2017. Historic public company data sourced from World Federation of Exchanges and NASDAQ.

3.2 Federal Choice of Forum The frequency rate of litigation against IPO companies has not gone unnoticed by D&O insurance carriers. One reason for this frequency rate is a circuit split. Unlike in the Federal Court of Appeals for the 2nd Circuit (dominated by New York), the 9th Circuit (dominated by California) has been all too willing to allow Section 11 cases (relating

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to material misstatements and omissions in registration statements like an S-1) to be brought in state court.

Plaintiffs have reacted by rushing into California courts to sue IPO companies.

For reasons we’ve discussed at length in the D&O Notebook, Section 11 cases in California state court are much more lucrative for the plaintiffs’ bar than if the same securities class action suit were to be brought in federal court.

But help may be on the way. The Supreme Court has agreed to hear a case that should resolve the circuit split—but we won’t have the Court’s opinion for a while.

Moreover, the Supreme Court may decide that the 9th Circuit is correct, which might lead to Section 11 suits being brought in state courts nationwide. Left unaddressed by Congress, this would not be good news for IPO companies or their insurance carriers.

Rather than just hope and pray, some private companies, most especially pre-IPO companies, are taking proactive steps to mitigate their risk by adopting Federal Choice of Forum provisions.

3.3 Cyber Liability Disclosures and Settlements The life and times of Yahoo!—including its recent sale to Verizon—will be a business case study for the ages. One of the more interesting chapters has been the fallout from Yahoo!’s failure to disclose certain cyber breaches in a timely way. Among the more concerning outcomes for directors and officers of public companies is the news that regulators, including the SEC, have launched an investigation into Yahoo’s disclosures on the topic. Yahoo! may well be the test case the SEC has been looking for ever since it issued its guidance on cyber disclosure back in 2011. This is clearly an area to watch.

In addition, consider the June 2017 consumer class action settlement by Anthem of $115 million from its devastating 2015 cyber breach involving the personal records of 79 million people. This settlement was record-breaking. One wonders if it’s also the new floor for settlements of future cyber-breaches involving personal information.

In addition to the reputational harm that comes from a cyber breach, settlements of

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Looking Ahead 2018 | ©Woodruff-Sawyer & Co.

this magnitude are another exposure for directors and officers to consider if their companies have a lot of sensitive records.

3.4 M&A Litigation Routine breach of fiduciary duty M&A litigation has stabilized at around 70% of deals.

This is still high, but is significantly lower than what we saw at the height of the M&Alitigation craze when more than 90% of all public company M&A deals valued over $100 million were met with a breach of fiduciary duty suit.

Percentage of M&A Deals Challenged by Shareholders (by deal year forDeals deals valued over $100M) Percentage ofand M&A Challenged

by Shareholders (By Deal Year and for Deals Valued Over $100M) 100% 90% 80%

93%

93%

94%

93%

86%

84% 73%

60

%

54% 40%

44%

20%

0% 2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: Cornerstone Research and “The Shifting Tides of Merger Litigation,” by Matthew Cain et al (Feb. 23, 2017)

The skepticism of the Delaware Chancery Court in late 2015 helped pull down the percentages, but make no mistake: disclosure-only settlements are still happening, including in Federal Court. Indeed, anecdotally, it seems that this litigation rate isn’t likely to decline much further if at all.

One reason may be good old forum shopping: given Delaware’s skepticism of their claims, it’s not surprising to see a number of M&A cases being filed in federal instead

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of state court. Consider too that plaintiffs have found a new way to extract a tax on M&A even in Delaware: mootness fee awards. A mootness fee may be awarded to a plaintiff whom the court feels hasn’t done enough work to warrant the award of a plaintiff’s attorney fee. The good news is that mootness fees are lower than what we saw being paid to plaintiff attorneys as part of the disclosure-only settlements of M&A claims.

The bad news is the defendants are still paying out shareholder money to settle these claims, and now the defendants don’t even get a full release from the plaintiffs.

3.5 Insider Trading Given human nature, illegal insider trading will probably always be a hot topic. In the last few years there was a quite a bit of confusion about what would cause a tipper to have liability for the trades of a tippee. Much of that has now been put to rest by the Supreme Court’s clarifying decision in United States v. Salman. Bottom line: a tipper doesn’t necessarily have to receive something in exchange for a tip in order for the tipper to have insider trading liability. This is especially true if the tippee is a relative.

3.6 Criminal Negligence Absent clearly deliberate bad acts by an executive him- or herself—think Enron or WorldCom—we don’t think of incarceration as a normal consequence for an executive whose company has an employee who misbehaves. If we are talking about a regulatory violation that harms the public’s safety, however, this assumption is a poor one. As a recent case in Colorado involving the Clean Air Act demonstrated, an executive responsible in a supervisory way for criminal negligence—even if not directly involved in the act him or herself—can be hit with personal fines and even imprisoned.

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4.

Expert Insights

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4.1 Renewal Pricing Q. What’s the optimal way for me to

ensure I get the best renewal price for my company’s D&O insurance?

A. Tell your story! Fundamentally, D&O

Norman Allen, Esq. Senior Vice President, Partner and CorpEx Practice Leader 415.402.6583

nallen@wsandco.com

READ NORMAN’S BIO

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underwriters are assessing the amount of risk they think is presented by your company, and its directors and officers. They are trying to figure out if you are likely to be sued by shareholders or be investigated by the SEC or DOJ. And if you are sued or investigated, do you have a better chance than most to beat the rap and do so at limited cost?

While underwriters rely on an increasing amount of data to help them assess the risk, they also rely on softer factors. Thus, your ability to tell a compelling story about your company can differentiate you from your peers. Consider what’s special about your corporate governance culture, the tone and tenor of management, the sophistication and involvement of the board, the attention to detail in everything you do.

This isn’t about promoting your company in a salesy way; it’s about leaving underwriters with an impression that you and your company are better than most in all the ways that really matter when assessing risk, and in ways that data alone cannot predict.

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4.2 Property and Casualty Q. What do directors and officers need

to know about P&C insurance?

A. While D&O insurance is certainly important,

Carolyn Polikoff Senior Vice President, Partner and National CorpEx and P&C Practice Leader 415.402.6513

cpolikoff@wsandco.com

READ CAROLYN’S BIO

most of a company’s risk transfer activities fall in the broader realm of Property & Casualty Insurance. Part of directors’ and officers’ competent execution of their fiduciary duty to manage a company’s risk is the exercise of first ensuring that they are working with an insurance broker who knows how to map their business risks onto the insurance landscape.

For example, not all “cyber risk” is covered by cyber insurance. Wire transfer fraud that results from business email compromise (i.e. phishing schemes, impersonation fraud, etc.) seems to be the quintessential example of something that “should” be covered by a cyber insurance policy.

As a matter of fact, however, this risk would be covered by a crime policy—but only if it has been properly endorsed to do so.

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4.3 Private Equity and Venture Capital Q. When it comes to covering Private

Equity and Venture Capital firms, is the General Partner Liability insurance form continuing to evolve?

Dan Berry Senior Vice President and Partner 415.399.6473

dberry@wsandco.com

READ DAN’S BIO

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A. Yes, absolutely. These policies are evolving

at a more rapid rate now than in recent years.

Woodruff-Sawyer—the market leader when it comes to this type of coverage—is driving many of these changes in response to the changing nature of the claims we are seeing. For example, many storied firms are now undergoing a generational shift. Often the changing of the guard goes well. Sometimes, however, the younger generation becomes disappointed. As a result, disputes can arise around the ownership of the general partner entity, particularly as it relates to distributions of carry. Add to the mix the increased scrutiny faced by registered investment advisors (RIAs) by the SEC and you have a recipe for more difficult, complex, and expensive claims than ever.

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4.4 Cyber Q. Do cyber policies cover cyber

extortion? Or do I have coverage for that in my Kidnap, Ransom & Extortion (K&R) policy?

A. Yes, cyber policies usually include coverage

Lauri Floresca Senior Vice President and Partner 415.402.6523

lfloresca@wsandco.com

READ LAURI’S BIO

for cyber extortion. The policy would cover both the cost of investigation/response as well as the ransom payment (should you choose to make it).

More importantly, if the cyber extortion leads to a data breach or shuts down your network and causes a revenue shortfall, the cyber policy can address those exposures too. Depending on the specific nature of the threat, a K&R policy might be triggered for the ransom and investigation, but would not cover the more significant damages and liability that the cyber extortion can inflict.

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4.5 International Q. Do I really need to worry about D&O

claims in other countries?

A. Visualize the effect of a large wave crashing

Megan Colwell Senior Vice President and Partner 415.399.6330

mcolwell@wsandco.com

READ MEGAN’S BIO

up against a rock wall, and then splashing back against itself. Such is the exposure associated with corporate issues that begin in one country and then cascade into another. Consider the recent case of a large corporate client that discovered inappropriate accounting practices in one country, resulting in a restatement of the parent’s financials. The restatement drew the interest of US regulators, who launched an investigation of the parent entity. That regulatory action in turn caught the attention of nonUS regulators, who then launched their own investigation of subsidiary entities in non-US jurisdictions.

From a D&O standpoint, individuals in several countries were targeted by regulators, affecting D&O coverage in multiple non-US geographies.

While US-styled D&O policies offer broad coverage for individual directors and officers, locally-styled D&O policies provide additional terms, conditions, and limits of insurance to respond to claims in local jurisdictions. In addition, local regulations in some countries impose tax penalties upon claim payment by non-resident insurers, or further, mandate local claim payment by a local insurance policy.

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4.6 Unicorns Q. As a recently anointed unicorn, how

can we best manage our evolving risk profile given our rapid growth trajectory?

A. Companies facing rapid growth often struggle

Jared Pelissier Senior Vice President and Partner 949.435.7365

jpelissier@wsandco.com

READ JARED’S BIO

with managing their quickly changing risk profiles. It’s all too easy to put off “upgrading” your approach to insurance, including because the entire topic can feel overly-complex and arcane.

Consider a data-driven approach. A sophisticated broker will use analytical tools like breach calculators, investment analysis and data about international regulations to ensure appropriate balance sheet protection and legal compliance as you scale. An industry-specific risk assessment is important too. You can use data to uncover litigation trends, high-severity concerns, and high-frequency exposures suffered by businesses like yours, all to jumpstart your strategy when it comes to loss control and risk transfer.

And don’t forget the pace of change. Many unicorn companies formally schedule quarterly or even monthly risk assessment meetings with their insurance broker to stay in front of their changing world and protect the company in an ever-changing risk environment.

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4.7 Reps and Warranties Q. Are corporate buyers of private

companies really using Reps & Warranties insurance these days? And do these polices really pay out?

A. The short answers are yes and yes. The growth

Emily Maier Transactional Solutions Group Leader 949.435.7378

emaier@wsandco.com

READ EMILY’S BIO

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in use of this insurance was led by Private Equity to win auctions and avoid having to fight with their new management teams. However, strategic corporate buyers are rapidly catching up to the value and it has almost become “table stakes” if you want to compete.

With regard to claims; the hugely increased number of policies and the ever broadening of terms has led to a substantial increase in claims.

I’ve covered this in some detail in my blog, the M&A Notebook. When it comes to successful handling of claims the issue is not whether there is a claim but in agreeing on a quantum for the amount of loss. It’s worth noting that, with the massive influx of new underwriters in this space, claims handling is highly variable and should be a major factor when deciding which carrier to work with.

Looking Ahead 2018 | ©Woodruff-Sawyer & Co.

4.8 Claims Q. How do I ensure that I can use the

lawyers I want at the rate I want when I get sued?

A. This is a tricky issue, and one that benefits

Priya Cherian Huskins, Esq. Senior Vice President and Partner 415.402.6527

phuskins@wsandco.com

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from planning ahead. Some carriers are open to pre-agreeing to certain counsel; rates are more challenging, but this can be done as well—especially for public companies paying large premiums. But beware: there are carriers that insist that you use a lawyer and firm from their “panel.”

In my experience securities law panel counsel lists are usually replete with outstanding options, but whether your particular counsel is on that list is something to check before you bind your policy.

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5.

Concluding Perspective A Message from the CEO

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Looking Ahead 2018 | ©Woodruff-Sawyer & Co.

A MESSAGE FROM THE CEO

In an ever-changing business environment, the need for expert and unconflicted risk counsel remains a constant.

We have developed a myriad of new products, tools and processes during our 99 years in business, with one goal in mind—to help our clients make better business decisions by better understanding their risk environment.

This was the impetus for our creation of a D&O Practice Group over 25 years ago. At that time, companies were being forced to make decisions about the amount of insurance to purchase—and the amount to self-insure—with no credible data or advice to support their decisions.

As a result, most organizations made decisions based on what others did.

Much has changed since then. Our introduction of empirical data and legal counsel into clients’ decision making process—through our proprietary

Securities Litigation Database and provision of advice informed by former practicing securities attorneys—is considered the best in class approach in our industry. It is also an approach that is often imitated but never duplicated at the level of service delivered by WS&Co. The risks facing companies have increased dramatically in both complexity and cost— driven by increased regulatory scope, scrutiny, and new risk areas like Cyber.

Insurers’ responses to this increased risk environment have also evolved as reflected in more thoughtful risk selection and a more consistent approach to companies at specific risk inflection points.

Our commitment to providing clients an unparalleled depth of expertise through clear, actionable counsel has not changed.

We continue to invest in the development and improvement of our expertise, resources, and tools to support our clients’ risk decisions as they evolve. This is the heart of our client service ethos and what underlies our reputation as a leader in Corporate & Executive Risk. Our annual Looking Ahead brochure exemplifies our commitment to this ethos and our ability to translate complex risk topics into relevant information our clients value.

It is a privilege to work with the dedicated team at WS&Co. and our outstanding clients who make all of this possible.

—Andy Barrengos, CEO 31

6. About WS&Co. Woodruff-Sawyer is one of the largest independent insurance brokerage firms in the nation, and an active partner of Assurex Global and International Benefits Network. For nearly 100 years, we’ve been partnering with clients to deliver effective insurance, employee benefits and risk management solutions, both nationally and abroad. Headquartered in San Francisco, Woodruff-Sawyer has offices throughout California and in Oregon, Washington, Colorado, Hawaii and New England.

For more information, call 844.WSANDCO (844.972.6326) or visit www.wsandco.com.

Find out why clients choose to work with WS&Co.

Additional Resources www.wsandco.com Cyber Notebook D&O Notebook M&A Notebook P&C Notebook D&O Board Education Resource Guide WS&Co. Seminars & Webinars

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Looking Ahead 2018 | ŠWoodruff-Sawyer & Co.

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Looking Ahead 2018 | ©Woodruff-Sawyer & Co.