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COVID-19 May Further Accelerate Rate Increases in the Directors and Officers Liability Market

By: Brian Polino, CPCU | Senior Production Underwriter, Vice President | Halcyon Underwriters

 Thu, July 14, 2020
Coronavirus
Coronavirus
Companies, both private and public, pay a lot more for their Directors and Officers Liability insurance premiums. According to a recent June 8th A.M. Best Market Segment Report, average price increases for D&O Insurance were 44% in the first quarter of 2020. The main drivers for D&O rates have been increased shareholder litigation, social inflation trends leading to higher jury awards, and the growth of litigation-finance funds, which pool investors to invest in corporate legal disputes. Now with coronavirus thrown into the mix, the COVID-19 pandemic could potentially accelerate worsening trends for the D&O marketplace.

As companies become scrutinized by shareholders, employees, and customers for their actions in response to COVID-19, we could see another wave of increased D&O suits and litigation estimates A.M. Best. As employees return to workplaces, executives must show that they followed CDC recommended protocols for protecting them, including monitoring proper physical distancing, following facial covering guidelines, office capacity limits, and sanitization. All those areas offer the potential for claims if companies improperly manage their return-to-the-office process. Moreover, directors could see claims from their customers for the same reasons as employee litigation could be brought.

Altogether, we can expect the D&O market hardening trend to continue for some time. As stated by the A.M. Best Report, “We can expect triple-digit increases in a post-COVID world as insurers respond to legacy issues such as increased litigation, litigation financing and keeping up with emerging claims and litigation due to COVID-19”. With the D&O market already doing poorly before COVID 19, A.M. Best claims that we could see an acceleration of carriers’ efforts for the rest of 2020 to increase pricing, reduce limits, and tighten terms now that the coronavirus pandemic is in full swing.

To hold down the rising costs of D&O insurance, some companies are raising their deductibles, while others are reducing limits purchased or even scraping their insurance altogether. In an extreme example, this past April, Tesla Inc. Chief Executive Elon Musk decided not to renew Telsa’s D&O insurance due to “disproportionately high premiums quoted by insurance companies,” he stated. Instead, in lieu of insurance, Mr. Musk personally agreed to cover his executives’ expenses in directors’ and officers’ lawsuits.

Given that most of our small business and middle-market policyholders cannot afford to self-insure their D&O risks, like Tesla, there are limited steps business owners can take to reduce their D&O insurance costs during this hardening market environment. Marketing a D&O policy to alternative carriers will yield minimal savings in an increasing rate environment, and reducing D&O limits also comes with pitfalls since D&O is written on a claims-made form. If insureds reduce their limits now to bring present savings with the plan to increase them at a future renewal when costs hopefully come down, they will reset their prior and pending date for the higher limit amount when they increase again. The prior and pending date will essentially reset the clock when the higher limits may apply to the policyholders’ D&O claims. In other words, the insured loses the higher limits entirely for those incurred but not yet reported claims of the past.

In light of social inflation and the claims-made coverage nature of D&O policies, insureds should keep their higher limits if they can. After all, their best risk management practice may be to budget for expected renewal increases and consider higher retentions if the risk/reward tradeoff makes sense. Fortunately, however, D&O insurance is usually a small line item in most small business and middle-market clients’ insurance portfolios, so budget pressures might not be as strenuous compared to that of a large, publicly-traded company. It is always better for companies to maintain the D&O protection they need and remain prepared for any potential claims that this post-corona world may bring.

Sources:
A.M. Best – Market Segment Report: Accelerating Trends, Unprecedented Turmoil Could Lead to Seismic Change for D&O Industry; COVID-19 may add even more challenges for D&O insurers. Date Posted: June 10, 2020

This content is strictly informational and should not be used as specific advice on insurance products, legal, accounting, and/or tax related matters. Insureds should always contact the appropriate licensed professional for their insurance, legal, accounting, or tax needs.

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