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NU Online News Service, Nov. 19, 9:43 a.m EST
CHICAGO—Insurers may have contributed to the credit crisis, because misbehaving company management increasingly believes their liability insurance policies protect them, a lawyer suggested at an industry conference last week.
Richard Bortnick, a coverage attorney for Cozen O’Connor in West Conshohocken, Pa. made his remarks at the international conference of the Minneapolis-based Professional Liability Underwriting Society.
His comments came during a session covering hot-button directors and officers liability insurance issues ranging from executive compensation to global warming, when he was asked whether the availability of insurance provided “an incentive for [Wall Street] executives to maybe not entirely play by the rules.”
He suggested this contributed to the credit crisis fueled by investment firms that securitized subprime mortgages and other debt obligations.
Addressing his question to a fellow panelist, Steven White, vice president of executive assurance claims for Arch Insurance Company in New York, Mr. Bortnick reasoned that “the perception of insurance is moving more towards a financial guaranty product.”
“It’s not, but directors and officers are looking at it that way [as a guaranty],”Mr. Bortnick said, basing his assessment on conversations he said he has had with insurance brokers and policyholder advocates.
Mr. White responded that “there are moral hazards with any insurance product and D&O [insurance] is no different.”
He said he believes, however, that the capacity to completely cover both settlement (or judgment) dollars and defense bills for lawsuits arising from “what is alleged to have happened in some of these incredible financial meltdowns” actually isn’t available from the insurance marketplace.
“You’re not thinking about your insurance when you start to go down that path” of reckless behavior, Mr. White asserted.
“At best, with the way defense costs are, your insurance tower probably is going to get you a defense, but it’s not going to protect you to the extent that you’re going to want to take those kinds of risks,” he said.
The exchange followed a discussion by legal and corporate governance experts about the roles that executive pay practices, shareholder pressures, and board and regulatory lapses have played in fueling the credit crisis.
After one governance expert, Gary Brown, a lawyer for Baker, Donelson, Bearman, Caldwell & Berkowitz in Washington, gave advice on how directors can stay out of trouble with some common-sense practices, Mr. White jumped in to give what he himself described as a “shameless plug” for two specialized D&O products—Side A policies and independent director liability policies.
These products cover non-indemnifiable D&O losses, providing separate towers of limits for separately identified groups of individuals. (Side A and IDL policies respond when a corporation cannot indemnify directors because of statutory prohibitions in a state, because the corporation is financially impaired, or for some other reason.)
“I’m not sure…discussions” about the need for these ancillary D&O products “are had as much as they should be,” Mr. White said. They are needed “in the event that everything Gary [Brown] is talking about somehow didn’t happen right—something goes a little bit sideways and they get sued.”
Panel moderator, Ivan Dolowich, a partner with Kaufman Dolowich Voluck & Gonzo LLP in New York, led off the session by asking about experts to weigh in on the causes of the credit crisis. “Are recent economic developments the result of poor business decisions or a systematic breakdown of business ethics?” Mr. Dolowich asked.
Ric Marshall, chief analyst for The Corporate Library in Portland, Me., a firm that analyzes corporate governance practices, said, “If you really step back, nearly everyone involved in the market system has some culpability here,” listing corporations themselves, boards of directors and management teams, shareholders who wanted more profits, and regulators for failing to exercise needed enforcement.
Mark Lebovitch, a plaintiffs’ lawyer for Bernstein Litowitz Berger & Grossmann LLP in New York, said there was “a massive failure for regulators and the law to put limits on what happened.”
“Wall Street [professionals] created products…they knew they shouldn’t” he continued. “People had incentives to act in ways to put their companies at risk—and ultimately the entire economy,” he said, referring to remarks by former Citibank chief executive, Charles Prince, who reportedly said his firm would “dance until the music stopped” when asked about the risks of collateralized debt obligations.
Wall Street bankers no longer spend their entire careers at one firm, instead moving around to obtain ever-more-lucrative pay packages, he said. So they work “to create earnings today [and] don’t really care about where the company is five or six years” in the future, the plaintiffs’ lawyer concluded.