the end of last year, however, he found things had changed. "My insurers wanted a 30% to 40% increase

to roll it over one more time, and I politely declined," he says, hopeful that the climate will change before he

has to renew. "Maybe I'll ride this thing out," he adds, but his tone of doubt is evident.

He is not alone. At New York-based publisher John Wiley & Sons, Treasurer Walter Conklin locked in a

three-year D&O policy from Chubb Specialty when rates were giveaways, but the insurance expires in

November. "I'm told now that three-year deals no longer are available and a 40% increase is not out ofthe norm," he says. "When November rolls around, it

won't be pretty."

"Deeper Hole"

Experts say that the D&O liability insurance market has

been ripped apart by sharp and staggering losses that will be passed along to the insured in the form of much

higher premiums for years to come. After eight successive years of flat or declining rates, companies

are paying, on average, 20% to 30% more for coverage this year. And it will only get worse.

"If people believe this is a one-year fix, they're being

na?ve," says Tony Galban, vice president and D&O underwriting manager at Chubb, the largest issuer of

D&O policies in the U.S. Insurers, he explains, are "in a much deeper hole than we thought we were."

The most publicized cause of their problems is a market-influenced storm of lawsuits from angry

shareholders and employees, many of which are being settled for startlingly high dollar amounts.

"The claim activity is absolutely dizzying," says Galban. "Bombs are dropping all over the place.

It's nothing now for shareholders to come together in a class action and allege damages in the $40 billion

range. And everybody is being sued–Cisco, Oracle and more dot-coms than I could e-mail in a day.

The sheer size and scope of the litigation is overwhelming."

What's worse, insurers are paying up because many defendant companies have weak cases. Among the

claims: restated earnings, accounting irregularities, discriminatory employment practices and poorly

executed mergers.

"Plaintiffs are alleging multibillion-dollar damages, so

settling for a few hundred million can look like a pretty good deal compared to going to trial," says Dan A.

Bailey, a partner and chairman of the D&O practice at the Columbus, Ohio-based law firm Arter & Hadden.

"If the company has restated its financial statements, in effect conceding there is material misrepresentation in

the information it presented to investors, that kind of evidence presents some real challenges in court."

Bailey says that in the past 18 months, he has seen about 10 settlements in excess of $100 million, including four

above $200 million. "There is every indication that these are not an aberration," he adds. "They're a trend."

The big settlements, of course, grab the headlines. Cendant, owner of the Ramada Inn chain and the

car-rental company Avis, has agreed to pay shareholders $3.1 billion over an accounting scandal

the company belatedly disclosed in 1998. In February, drug retailer Rite Aid paid $193 million to angry

shareholders who saw the company restate earnings several times after the SEC charged it with inflating its

earnings by about $1.5 billion.

The bulk of D&O claims, to be sure, are much lower and are unrelated to direct fraud. The most common

cause of action in 2000 was job discrimination, which was claimed in 28% of all cases, according to a survey

of 1,957 U.S.-based corporations conducted earlier this year by Tillinghast-Towers Perrin. Job termination was

second, at 25%.

Such cases rarely bring blockbuster settlements. The

average paid claim in 2000 among the survey participants was $9.62 million, up from $8.67 million

in 1999 and $7.16 million in 1998. But the claims are increasing and the premiums are rising.

D&O insurers themselves helped create the current crisis. In their zeal to capture market share in the

mid-1990s, they repeatedly reduced premiums on renewal (usually annually) and tacked on additional

coverages. Both Chubb and American International Group, another major D&O carrier, even expanded

coverage beyond directors and officers to the corporation itself.

That put the insurers on the hook for 100% of damages, whereas previously they only covered the claim loss

allocated to the officers and directors, explains Steven Anderson, managing director and vice chairman of

FINPRO, a professional liability insurance unit of Marsh. What's more, they agreed to reimburse their

customers' premiums in cases where the insurers won their D&O litigation.

Swallowing Hard

What can companies do? There's much talk of integrated risk transfer strategies, which utilize

portfolio theories to blend diverse financial, operational and strategic exposures into an aggregate

block of risk for transfer. Such programs typically cost less than buying separate insurance policies or

transferring risk with capital market instruments. However, they are difficult to construct and few risk

managers are convinced they are worth the effort, insurance professionals say.

Another alternative is for companies to willingly retain more risk by accepting higher deductibles.

Illinois Tool Works, a Glenview, Ill.-based, $10 billion manufacturer of automotive parts and packaging,

may do just that when it renews its D&O liability policy, which ends in November, says Richard

Schmidt, director of risk management.

"We did that with our product liability policy and were able to actually lower our premium," he says. "Whether

we'll be that fortunate with our D&O policy remains to be seen."

Schmidt also is considering the expensive step ofreactivating a captive insurance company for D&O that

Illinois Tool had deactivated when the insurance market softened in the 1990s. "We'd only do that as a

last resort," he says.