Is the market really starting to harden?
By Joseph S. Harrington, CPCU
Today’s agents, brokers, and underwriters have seen enormous growth and change in the frequency, severity, and nature of claims against directors and officers of both for-profit and nonprofit organizations. They’ve also seen corresponding changes in the scope and application of directors and officers liability policies.
What they haven’t seen, unless they were in the business in the late 1980s, is a genuinely hard market where sellers dictate the terms and price of coverage and buyers accept what they can get. Today’s D&O insurance professionals may never see those conditions again, but they may be witnessing the first hardening of the market in years.
Speaking of the conditions for coverage in the U.S. corporate sector, Mark Peeters, chief executive officer of StartPoint Executive Risks, says “broadly speaking, the market is hardening and rates are increasing.” StartPoint is a London-based managing general underwriter within the Ryan Specialty Group.
“Carriers are pulling back on limits, and you have to involve more insurers [on a risk],” Peeters adds.
The principal factor, Peeters says, has been a dramatic increase in the number of securities class action suits in the United States, which he says rose to more than 400 in 2017 and 2018, about double the number of previous years. That increase, he notes, reflects a surge in mergers and acquisitions and a “vibrant market” for initial public offerings.
“If a utility company had decided
not to trim bushes [near power equipment] because it was too expensive, it absolutely could be seen as negligence on the part of the officers and directors.”
Chief Executive Officer
StartPoint Executive Risks
“The market is getting harder for private, public, and financial institution D&O coverage,” says Garrett Koehn, western US regional director for the CRC Group. “Carriers continue to see D&O losses and are pricing programs with higher retentions and premiums. Also, they are adding exclusions.”
Kevin LaCroix, a prominent observer of the U.S. D&O market and author of the online “The D&O Diary,” concurs with those assessments, although cautiously. “Underwriters tell me they are pushing for rate this year.” Whether they’ll get it is another matter, he says, as new competitors may enter the market.
Climate of change
Peeters and LaCroix spoke to Rough Notes as Pacific Gas & Electric, a major California utility company, declared bankruptcy in the wake of claims that its negligence contributed to last fall’s devastating California wildfires. Both observers expect the claims against PG&E to trigger D&O coverage.
Speaking hypothetically and not of PG&E in particular, Peeters notes that “if a utility company had decided not to trim bushes [near power equipment] because it was too expensive, it absolutely could be seen as negligence on the part of the officers and directors.”
The question, says Peeters, is whether a fire that arises from the proximity of power equipment to vegetation would be deemed a singular, fortuitous event, and thus outside the scope of directors and officers liability as traditionally understood, or whether environmental factors that contribute to a loss were sufficiently well known that directors and officers should have acted differently.
“PG&E is the first [corporate] victim of a climate change catastrophe,” says LaCroix, adding that acts that may have been prudent under different climate conditions may come to be seen as negligent in light of prolonged droughts, increased coastal flooding, and other events attributed by some to global warming.
“We’re going to see more and more of these types of claims in the future,” he says. “It’s not clear who the next casualty is going to be.”
If the D&O market hardens, it is likely to be less pronounced for organizations other than for-profit corporations.
“The D&O market is still stable,” says Kyle Hyla, program underwriter for community associations, including directors and officers, at Distinguished Programs. “There remains adequate capacity and a strong appetite for the coverage.
“When it comes to D&O coverage, one size does not fit all. It is critical
to understand the exposures and trends
specific to each industry.”
Program Underwriter for Community Associations
“Outside of isolated cases where we have seen slight to moderate rate increases, pricing has remained consistent,” Hyla adds. “The pockets of rate increases we have seen tend to be a function of underpricing a risk more than the result of a new or emerging trend.”
Hyla says recent D&O claim experience has been generally good, which he says is not surprising given the strong economy. There are always new sources of claims, however, and Hyla notes that he is seeing a growing number of claims against condominium associations and directors regarding their treatment of “emotional support animals” under association policies with respect to pet ownership.
“Silent” cyber coverage
Exposure to first- and third-party losses that arise from cyber incidents continues to be a paramount concern of directors and officers, but the role of cyber coverage in D&O liability coverage is still being defined.
Cyber insurance has matured as a line of coverage, and virtually all corporations that have D&O liability also have a cyber policy that covers first-party losses for expenses incurred in the wake of a data breach as well as third-party claims brought by individuals and organizations whose information was compromised.
Although D&O policies typically have explicit exclusions for bodily injury and property damage (covered under general liability policies) or professional liability (covered under errors and omissions policies), insurers thus far have not chosen to exclude cyber losses from D&O coverage.
As a result, a D&O policy typically retains “silent cyber coverage,” in Peeters’ words; the policy may not cover any error or omission that led to a breach, but it will respond to a claim against officers and directors for allowing the breach to happen—or at least the insureds expect it to respond.
“There is absolutely a lot more scrutiny of cyber exposure,” Peeters says. “In every client call there are questions about cyber protocols and procedures.”
Explicit cyber coverage
Cyber and D&O liability are so intermingled that Beazley, a London-based specialty insurer, has created a division called Cyber & Executive Risk, which will provide risk consulting and coverage for both aspects of organizational risk.
“We brought our expertise in these areas together for two main reasons,” said Mike Donovan, head of the new division, in a statement from Beazley. “First, they are rapidly changing risks that are growing harder for companies to manage.
“We’re protecting critical assets … . A cyber-attack can put all of these assets at risk, but a class action lawsuit against a company’s directors can be comparably damaging.”
Head of Cyber and Executive Risk
“Second, the stakes are very high. We’re protecting critical assets—our clients’ data, their operations, their senior executives, and their corporate reputations. A cyber attack can put all of these assets at risk, but a class action lawsuit against a company’s directors can be comparably damaging.”
Cyber coverage is already expressly included or available by option under some D&O policies.
“Data and cyber liability coverage can be offered within leading association D&O policy forms or as an optional extension,” says Hyla. “The coverage is designed to protect the association from costs arising from breaches of non-public personally identifiable information that is privately stored.
“For example: If an association stores any data related to monthly payments by unit owners, it may be liable for any leak of that information.”
Hyla notes that many community associations use “endorsement D&O” policies, which offer limited coverage for selected exposures. While these policies save insureds money, Hyla cautions that they may lack critical coverages the insurer prefers not to provide.
“Endorsement forms often have limitations on who can be an insured and when a claim can be submitted,” he says. “They can also sub-limit or exclude specific coverages, including cyber claims. They really exemplify the adage of ‘you get what you pay for.’”
While all D&O policies are not created equal, all companies may be equal in terms of their exposure to D&O claims. That’s true even of small, privately held companies.
LaCroix is among the growing number of voices warning small family enterprises that they, too, face legal action from customers, suppliers, vendors, competitors, and employees over their management decisions.
“It’s not just a question of conflict over ownership changes anymore,” he says. “I would never, ever work [in a management capacity] for any company that doesn’t have D&O coverage.”
Along that line, CRC Group’s Koehn says that “there is a lot of concern with highly valued private companies, sometimes referred to as ‘unicorns.’ Carriers are underwriting them more like public companies as underwriters feel that these companies have more visibility and more exposure to being targets for all different types of D&O litigation.”
“It’s not just a question of conflict over ownership changes anymore. I would never, ever work [in a management capacity] for any company that doesn’t have D&O coverage.”
The D&O Diary
Just because D&O insurance is increasingly relevant to small companies doesn’t mean agents and brokers who serve the small business market can easily add the coverage to their offerings.
“This is not a space to dabble in,” LaCroix cautions. “This is a space where you really need expertise.”
In particular, he says, non-standardized D&O policies vary greatly in the wording of exclusions for professional liability, contractual liability, and anti-trust/competitive practices, which results in substantial differences in the scope of coverage under different forms.
Koehn agrees. “Brokers that are placing this coverage really need to be experienced in it,” he says. “The [carrier] markets are constantly changing and evolving and the complex, personal nature of this insurance requires a specialist to make sure that the broadest coverage is being offered.”
“When it comes to D&O coverage, one size does not fit all,” says Hyla. “It is critical to understand the exposures and trends specific to each industry. While insurance should be used to mitigate the severity of obscure or catastrophic exposures, proactive and preventive maintenance, whether addressing physical or management-related liabilities, is unquestionably the most cost-effective strategy to protect an insured’s operational and financial well-being.”
“Brokers and agents have to know their subject matter, their clients’ needs, and the coverages, pricing, terms, and conditions,” says Peeters. “Agents and brokers will have to do their homework to do their job, but good ones will come to the fore.”
For more information:
The D&O Diary
StartPoint Executive Risks
Joseph S. Harrington, CPCU, is an independent business writer who specializes in property and casualty coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Before that he worked in journalism and as a reporter and editor in financial services.