October 8, 2004 Presented By: Don Ortegel Aon Risk Services – Financial Services Group

1. A Directors’ & Officers’ Liability and Errors & Omissions Insurance Discussion October 8, 2004 Presented By: Don Ortegel Aon Risk Services – Financial Services Group

2. Directors’ & Officers’ Liability Insurance for Private Companies “Trouble brings experience, and experience brings wisdom.” - unknown

3. D & O Claims “You can observe a lot by just watching.” - Yogi Berra

4. Claims Against Private Companies Percentage by Type of Claimant Identifies the need for EPL and Securities Claims Coverage for Private Companies

5. Claims Against Private Companies D&O Claim Allegations from Employee Claimants by Ownership - US OWNERSHIP Fewer than 500 500 or more Shareholders Shareholders Allegation Non Profit Wrongful employee dismissal or termination 21% 36% 35% Breach of employment contract (not termination) 5% 13% 10% Salary, wage or compensation dispute 0% 9% Pension, welfare or other employee benefit dispute ( not salary, wage or compensation) 0% 3% 7% Discrimination 49% 21% 17% Defamation 1% 0% 2% Harassment/Humiliation 9% 15% 8% Retaliation/Whistle blower 7% 1% 1% Union or other contract group 0% 0% 1% Employment conditions/safety 0% 0% 1% Breach of contract 1% 0% 2% Failure to hire or promote 1% 0% 4% Other employee issues/issue not specified 6% 6% 3% Source: 2002 Tillinghast-Towers Perrin D&O Liability Study

6. Who Pays the Bills? Three Alternatives • Individual Director or Officer • Corporation • The D&O Insurer • Risk Transfer

7. What is D&O Insurance “An investment in knowledge pays the best interest.” - Benjamin Franklin

8. What is D&O Insurance • Covers claims made against D’s & O’s within the policy period (vs. occurrence) • D’s & O’s are covered for acting within their scope and capacity as D’s & O’s of their company or a subsidiary • The contract works on an “All Risk” basis. • Thus, exclusions are key • Unfortunately, exclusions are not only contained with the “exclusions” section of the policy • Typical / significant exclusions include: • Fraud, Dishonesty, Criminal Acts (if proven) • Known or existing liabilities • Outside Directorship liability • Punitive Damages

9. What is D&O Insurance There are two main insuring agreements: • Insuring Agreement A • Covers D’s & O’s to the extent the company is unable to reimburse the them • Insuring Agreement B • Covers the company’s obligation to indemnify the D’s & O’s • Important: this does not cover the legal liability of the company • Another insuring agreement can be added to most forms to cover the legal liability of the company. • Subject to limitations i.e. securities claims and employment practices liability claims

10. Key Coverage Features Significant coverage features should include (but not be limited to): • Favorable Severability language (Application & Exclusions) • Representations/Application – Cutter & Buck / HealthSouth • Exclusions – PinkMonkey.com • Final Adjudication vs. In fact language • Punitive Damages Coverage • IPO Notification language in lieu of securities exclusion • Automatic coverage for all types of private placements • Lack of a Failure to Maintain Insurance exclusion • Notice & Reporting requirements • Timing, Triggers and Panel counsel requirements • Auto acquisition coverage • Order of Payments Language

11. Key Program Considerations Specific Program construction ideas may include: • Full Entity Coverage • Employment Practices Liability coverage (dilution of D&O limits) • Dedicated Side A Coverage (satisfaction of high net worth D’s & O’s) • Non-rescindable policy provision • Low versus High retention level • Layered programs • Best use of insurer capacity & comfort • Firewalls • Multiple insurer relationships • Appropriate Limits of Liability (Benchmarking – Peer Data)

12. Issues & Observations • Benefits of purchase: • Existing or Prospective Board Member Comfort & Attraction • Risk Transfer – Preserve Corporate Balance Sheet • Inexpensive ($5,000 to $10,000 for first million) • Signing of Warranty Statements • Continuity of Prior & Pending Litigation Exclusions • Drawbacks of Private Company Purchase: • Internal Budgeting Constraints • Typical form covers little exposure (i.e. securities exclusion & lack of Employment Practice Liability Insurance (EPL)) • D&O exposure (excepting EPL) is not significant • Private company insurers don’t always like their insureds if they ever go public

13. Current Marketplace “The time to prepare the roof is when the sun is shining.” - John F. Kennedy

14. Directors’ & Officers’ Liability Insurance- How did we get here?

15. Issues & Observations • Large Private Company Marketplace (30+ players) • Policy forms differ dramatically  Pricing somewhat commodity like • High Profit Margins for Insurers • Insurers to treat all industries the same due to a lack of concern about (non Public Stock Trading exposure): • Volatility of Stock Price & Exploding Market Capitalization • Public Representations & Safe Harbors • Insider trading • Underwriters focus on.. • Business fundamentals • Financials (profitability) • Level of experience for the board and management

16. Issues & Observations • The D&O underwriting business has been an unprofitable sector for at least four, and possibly five, out of the past six years – driven by Public Companies • Insurers set aggressive D&O goals for 2004, with budgets including modest price increases • Many of the established insurers re-forecasted premium volume downward • Competition has increased quarter over quarter during 2004 • Capacity - No new capacity • St. Paul/Travelers merger – Gulf assimilated in to new combined entity • Retentions – increasing slightly for those accounts with poor loss history of claims • Multi-year deals are still very limited • Policy wording…more restrictive however unchanged over the past 18 months • New Primary Policy Forms – AIG – more restrictive requiring more customization • Small to middle market accounts continue to be the most competitive segment • Premiums – Flat to 35% reductions over expiring • Excess Premium are being quoted at lower percentages of the underlying

17. Marketing Process & Strategy Insurers now feel as vulnerable as InvestorsUnderwriting is in vogue! “The science of winning is being totally prepared.” - Unknown

18. Presenting Your Company to the Marketplace How you tell your Story will be of Significance. Don’t let underwriters ‘judge a book by its cover.’ For example…

19. Strategies for a Successful Renewal • Establish priorities for renewal and evaluate all alternatives • Higher Deductible, Co-Insurance, Program Design (Side A) • Create a Timeline with specific tasks (risk management, broker, etc.) • Meet with your Underwriters face-to-face • Encourage Senior Management to be involved • Be prepared to answer All Pertinent Questions/Issues • Educate underwriters about Your Company’s business and industry • Distinguish Your Company from the rest of the Marketplace and your Peers • Identify and address any “Issues” upfront and head-on with Underwriters • Leverage ALL current insurer relationships • Challenge insurers, and Finish early !

20. Errors & Omissions Liability Insurance for Private Companies “It doesn’t work to leap a twenty foot chasm in two ten foot jumps.” - American Proverb

21. What is the E&O coverage? • Professional Liability Insurance • Coverage for claims alleging negligence in the provision of your services or in the creation, manufacture, development, distribution, license or sale of your products • May cover, or be endorsed to cover: • Certain intellectual property infringement • Advertising/Personal injury • Network liability • Media liability • Not a surety instrument…though some claims/settlement situations blur the line • Significant variability in coverage terms & conditions by carrier

22. Why is it Important? Economic transformation • Manufacturing society to a Service/Information society • Product companies deriving greater percentage of revenues from services • Proliferation of ‘Consultant’ business models • Rise in the amount & criticality of data • Even manufacturers that do not perform ‘services’ may be exposed to claims alleging economic loss due to the failure of their products Rising Claim Frequency & Severity • Duty of care owed by ‘new professionals’ is ever escalating • Service provider contracts growing in size and length • Beyond ‘negligent performance’ to include class actions, intellectual property disputes, and claims arising from unauthorized access to systems/data Contractual requirements • From $1MM-$100MM • Self-insurance certificates and fronting strategies may not meet requirements

23. Current Marketplace Conditions 1992-2000 • Generous structure • Lax underwriting • Broad forms • Artificially low pricing 2000-2003 • Unprecedented underwriting diligence. • Treaty restrictions: • Policy form inflexibility • Class/Size of business restrictions • Professional risks excluded from excess/umbrella placements • Pricing/Retention increases 25-300% Today • Increased competition – more for excess than primary business. • Price/Retention moderation • Competition for premium dollars • Rising combined ratios offset by investment income

24. Insured Response Thoughtful analysis with input from legal, consulting, brokerage partners: • Examination and demonstration of operational/contractual controls • Focus on contracting procedures, dispute avoidance/resolution process, vendor/IC vetting process • Alignment of program structure with corporate philosophy on risk • Voluntary increase in deductibles/SIRs • Reduction of limit • Elimination of certain insuring agreements – ‘tailoring’ a solution • Renewed interest in exploring Alternative Risk approaches • Fronting/Retained limit layers • Co-Insurance provisions • Captives

25. Aon Risk Services – Financial Services Group “We have deep depth.” - Yogi Berra