An Illinois D&O Filing Priced Insured Company Counsel as a Separate Risk Load
An Illinois-domiciled carrier filed a rate request that asked regulators for permission to treat the legal fees generated by an insured company's independent counsel as a distinct risk load — a charge layered on top of the traditional premium for directors and officers coverage. The filing, submitted to the Illinois Department of Insurance in late 2024, argued that when a policyholder selects its own law firm rather than using the insurer's panel counsel, the resulting legal expenses are less predictable, more prone to escalation, and therefore warrant a separate actuarial charge. The request did not seek to eliminate coverage for defense costs; it sought to price them as a distinct exposure, uncoupled from the indemnity limit. Regulators, caught between actuarial logic and the risk of double charging, opened a public hearing that drew testimony from trade groups, brokers, and competing carriers. By early 2025, the filing was approved with conditions — annual experience reporting and a cap on the load for small and midsize insureds. The decision sent a signal across the D&O market: the era of bundling defense and indemnity into a single premium pool may be ending.
The Filing That Broke a Pricing Norm
The filing, identified by the Illinois DOI as Form IL-DO-2024-089, proposed a base premium for D&O liability coverage and a separate surcharge — called a "counsel risk load" — equal to roughly 15 percent of the base premium for policies where the insured retained the right to choose independent defense counsel. The carrier's actuarial memorandum cited a five-year study of its own claims data showing that cases handled by insured-selected counsel incurred legal expenses that were, on average, 22 percent higher than those handled by panel counsel, with a wider variance in outcomes. The insurer argued that this cost differential reflected not inefficiency but the strategic incentives of counsel who answer to the corporate client rather than the carrier — longer investigations, more aggressive motion practice, and a lower threshold for settlement.
Regulators pressed the carrier on whether the load effectively penalized a policy feature — independent counsel selection — that many insureds consider a fundamental right. The carrier responded that the load was not a penalty but a risk-based price adjustment, akin to how property insurers charge higher premiums for homes with older roofs or in wildfire zones. The Illinois DOI's own staff actuary noted that the filing's methodology separated the frequency of coverage disputes from the severity of defense costs, a distinction that had not been made in prior D&O rate filings. The hearing record, which runs to 340 pages, includes testimony from a former state insurance commissioner who called the load "a rational response to adverse selection" — companies that expect high defense costs are precisely those most likely to insist on independent counsel.
Consumer and business groups raised concerns that the load could double charge policyholders if not carefully monitored. They pointed out that the base premium already included a component for anticipated defense costs, and the new load added a second charge for the same exposure. The carrier addressed this by agreeing to reduce the base premium's defense-cost loading by an amount equal to the expected value of the counsel risk load, a concession that satisfied the DOI's actuarial division. The final order, issued in March 2025, approved the load for policies with annual premiums above $50,000, exempting smaller insureds from the surcharge. The decision also required the carrier to file annual experience reports breaking out defense costs by counsel type, so the DOI could verify the load's accuracy over time.
Industry observers noted that the filing's timing coincided with broader trends in liability insurance. For D&O carriers, the counsel risk load represented a way to isolate a cost driver that had been growing faster than indemnity payments for several years. The rising frequency of securities class actions and the increasing complexity of corporate litigation have made defense costs a larger share of total claim spend. Some carriers have begun using predictive modeling to estimate the likelihood that an insured will select independent counsel, based on factors such as industry, revenue, and prior claims history. These models help underwriters price the load more accurately and offer discounts to accounts that are likely to accept panel counsel.
How Counsel Costs Became a Separate Load
Traditional D&O policies bundle defense costs within the aggregate limit — meaning every dollar spent on lawyers reduces the pool available to pay settlements or judgments. This structure, known as "eroding limits," creates a direct tension between the insured's interest in a vigorous defense and the insurer's interest in controlling legal spending. When the insured selects independent counsel, that tension intensifies because the law firm's primary loyalty is to the corporate client, not the carrier. The Illinois filing made explicit what many claims handlers already knew: independent counsel tends to litigate longer, file more motions, and resist early settlement — all of which drive up defense costs.
The actuarial model behind the load separated indemnity risk — the probability and severity of a covered loss — from defense-cost risk, treating each as an independent variable. The carrier's filing included a matrix showing that for companies with revenues above $500 million, the defense-cost risk load was roughly 18 percent of base premium, while for smaller firms it was around 10 percent. The difference reflected the greater complexity and longer duration of securities litigation against larger companies. The model also accounted for the frequency of coverage disputes, which tend to generate legal fees on both sides — the insurer's panel counsel and the insured's independent counsel — before any determination of coverage.
Reinsurers took note. Several of the carrier's treaty reinsurers requested amendments to their agreements to clarify how the counsel risk load would be treated in loss-allocation schedules. Traditionally, ceded premiums and losses for D&O business were calculated on a combined basis — defense and indemnity together. The new load required reinsurers to split the premium into two streams: the base premium for indemnity and panel-counsel defense, and the load for independent-counsel defense. Some reinsurers pushed back, arguing that the load introduced moral hazard by giving insureds a financial incentive to select independent counsel once the premium was paid. Others saw an opportunity: they could price the load layer separately, offering facultative reinsurance specifically for independent-counsel defense costs.
The retrocession market — where reinsurers buy their own reinsurance — also stirred. Retrocessionaires examined the frequency of coverage disputes in D&O claims, which had been rising as securities class actions became more common. They worried that the counsel risk load would concentrate defense-cost exposure in a layer that was harder to model than traditional indemnity. Some retrocessionaires capped their exposure to the load layer at 10 percent of the original policy limit, while others excluded it entirely from quota-share treaties. The result was a tiered reinsurance structure that mirrored the growing complexity of the underlying product.
Premium Flow and the Reinsurance Ripple
Under the new structure, the premium dollar flows through three distinct channels. The base premium — roughly 85 percent of the total — covers indemnity risk and defense costs from panel counsel. This portion is ceded to treaty reinsurers under existing agreements, with a ceding commission that reflects the carrier's expectation of lower defense costs for panel-managed claims. The counsel risk load — the remaining 15 percent — is held in a separate account, ceded to a different set of reinsurers that have agreed to cover independent-counsel defense costs. Some carriers have structured this as a quota-share treaty with a 50 percent cession, while others use excess-of-loss treaties with attachment points tied to the size of the load.
The separation of premium flows has implications for loss reserving. Carriers now set aside reserves for two types of defense-cost claims: those expected to be handled by panel counsel, which are reserved at a lower average cost, and those expected to be handled by independent counsel, which are reserved at a higher average cost. The Illinois filing required the carrier to maintain separate loss triangles for each category, a level of granularity that some smaller carriers lack the data to support. Industry analysts estimate that the new reserving approach increased carried reserves for D&O business by roughly 5 to 8 percent in the first year, though much of that increase was offset by a corresponding reduction in the base premium's defense-cost loading.
Reinsurers that accepted the load layer demanded clearer loss-allocation schedules. They wanted to know, for each claim, what share of defense costs was attributable to independent counsel versus panel counsel, and whether any of those costs could be recovered from third parties. The carrier responded by developing a claims-coding system that tags every legal invoice with the counsel type, the billing attorney, and the phase of litigation. This data is now reported quarterly to reinsurers, who use it to refine their own pricing models. Some reinsurers have begun offering a discount on the load layer for insureds that agree to use a panel of pre-approved independent law firms — a compromise that preserves the insured's right to choose while giving the carrier some cost predictability.
The ripple effect extended to the retrocession market, where the concept of a parametric trigger — a fixed payment based on a measurable event, such as the filing of a securities class action — appealed to some D&O carriers as a way to hedge the counsel risk load. No such instrument has been issued yet, but several investment banks have begun exploratory discussions with carriers about creating a defense-cost index linked to securities litigation filings. Such an index would allow carriers to transfer the volatility of independent-counsel defense costs to capital markets investors, similar to how catastrophe bonds transfer natural catastrophe risk.
Regulatory Scrutiny and Rate Hearing Dynamics
The Illinois DOI's hearing on the filing drew a packed room. The carrier's chief actuary testified first, walking through the data that showed independent-counsel defense costs averaging 22 percent higher than panel-counsel costs, with a standard deviation nearly twice as large. He argued that this variance represented a systematic risk that the base premium could not capture without penalizing all policyholders. The load, he said, was a way to make pricing more accurate: insureds that chose independent counsel would pay for that choice, while those that accepted panel counsel would see lower premiums.
Opposition came from the Illinois Chamber of Commerce, which argued that the load would discourage companies from exercising their right to independent counsel — a right that, in some cases, is written into the D&O policy itself. The Chamber's representative noted that many corporate directors insist on independent counsel as a condition of serving on the board, and that the load could become a point of contention in boardroom negotiations over D&O coverage. She also raised the concern that the load could be used by carriers as a backdoor way to limit coverage, by making independent counsel prohibitively expensive for smaller companies.
The hearing also included testimony from an actuarial expert retained by a consumer advocacy group. He argued that the carrier's data did not adequately control for claim complexity — that independent counsel may be chosen precisely for the most complex, high-stakes cases, which would naturally have higher defense costs regardless of who handled them. The carrier countered by presenting a matched-pair analysis, comparing cases of similar size and complexity where the only difference was counsel selection. The analysis showed that independent-counsel cases were more expensive even after controlling for complexity, though the margin narrowed to roughly 12 percent.
The DOI's final order approved the load with conditions. The carrier must file annual experience reports showing actual defense costs by counsel type, and the load rate must be recalibrated every three years based on that data. The order also capped the load at 10 percent of base premium for insureds with annual premiums below $100,000, a concession to small businesses. The decision was widely seen as a compromise: it allowed the carrier to test the load in the market while giving regulators and policyholders a mechanism to challenge it if costs did not materialize as projected.
Market Response and Competitive Positioning
Within months of the Illinois approval, at least three other carriers filed similar counsel risk loads in other states — Texas, New York, and California. Each filing adapted the Illinois model to local regulatory requirements, with variations in the load percentage and the size of the exemption. In Texas, the load was set at a flat 12 percent with no exemption; in New York, it was filed as a range of 10 to 20 percent depending on the insured's industry, with a sunset clause requiring re-approval after two years. The California filing remains pending as of mid-2026, with the DOI requesting additional data on the correlation between counsel selection and litigation outcomes.
Brokers quickly adapted. Several large brokerage firms developed negotiation checklists that advise risk managers to push for a load cap — typically 10 percent of base premium — and to request a policy endorsement that waives the load if the insured agrees to use a panel of pre-approved independent counsel. Some brokers have also begun negotiating multi-year agreements that lock in the load rate for the policy period, protecting the insured from mid-term increases. For large accounts with premiums exceeding $1 million, brokers have been able to reduce the load to as low as 5 percent, or eliminate it entirely by negotiating a flat defense-cost allowance that replaces the load.
Captive insurers — entities owned by the insured company that self-insure a portion of the risk — have evaluated the load as a candidate for self-insurance. A captive can write a direct policy covering the counsel risk load, effectively bypassing the commercial carrier's surcharge. This approach works best for companies with large D&O programs and a well-capitalized captive, as the load layer typically represents only a small fraction of the total premium. However, captives must be careful not to violate tax rules that require risk distribution across multiple exposures. Some captives have addressed this by pooling the load risk across multiple subsidiaries or by purchasing reinsurance for the load layer from a third party.
The market impact on premium rates has been modest but measurable. Industry estimates put the aggregate premium increase for D&O policies affected by the counsel risk load at roughly 5 to 10 percent, though the increase varies widely by account size and industry. Technology and life sciences companies, which face higher-than-average securities litigation risk, have seen increases at the upper end of that range, while financial services firms, which often have negotiated panel-counsel arrangements, have seen smaller increases. Some carriers have chosen not to adopt the load, instead competing on price for accounts that are willing to accept panel counsel — a strategy that has preserved a segment of the market for traditional bundled D&O products.
Practical Takeaways for Risk Managers
For risk managers evaluating D&O coverage in the wake of the Illinois filing, the first step is to review the policy language for any reference to defense sub-limits or separate counsel cost loads. Some carriers have embedded the load in the policy's definitions section, tying it to the insured's right to select independent counsel. If the load is present, risk managers should ask for a clear breakdown of how it is calculated — whether as a flat percentage of base premium, a per-claim surcharge, or a sliding scale based on the insured's revenue or industry sector.
Negotiation leverage exists. Brokers report that carriers are often willing to cap the load at a fixed dollar amount or to waive it entirely for accounts with strong loss histories or multi-year commitments. Risk managers should also explore the option of using a panel of pre-approved independent counsel, which some carriers offer as a way to reduce the load while preserving the insured's choice. The key is to model the total cost of risk under different scenarios — with and without the load — and to compare that to the cost of alternative risk transfer mechanisms, such as a captive or a parametric trigger.
Monitoring state filing libraries is another practical step. The Illinois DOI publishes approved rate filings on its website, and many other states follow similar practices. By tracking filings in the states where their company operates, risk managers can anticipate changes and negotiate before the load becomes standard. Some brokers offer subscription services that alert clients to new filings in their industry, a tool that can provide weeks of advance notice before a load takes effect.
Finally, risk managers should consider the broader trend that the counsel risk load represents: the unbundling of services that were once bundled into a single premium. As carriers become more sophisticated in pricing the components of liability risk, the traditional D&O policy is evolving into a modular product with separate charges for defense, indemnity, and ancillary services. This evolution offers opportunities for cost savings — by selecting only the components needed — but also requires more active management of the insurance program. Risk managers should stay informed about regulatory developments and market innovations to effectively navigate these changes.
This article is for informational purposes only and does not constitute professional insurance, legal, or financial advice. Readers should consult qualified professionals for advice tailored to their specific circumstances.
