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Protecting Your Insureds in an Evolving D&O Market

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The Directors & Officers (D&O) insurance landscape has seen – and continues to see – a real shift over the last few years. Insurance rates have gone up while some carriers have tightened their underwriting, deployed lower limits, or have curbed their appetite in specific areas of the country and in certain niche markets. Public corporations as well as private companies and nonprofits have been impacted.

Public corporations, particularly tech, biotech and start-up companies, have been hit by a spate of investor lawsuits in the wake of IPOs that have gone awry or have failed, resulting in higher D&O rates and tighter capacity for companies going public. This has been further exacerbated by an increase in Securities Class Action Litigation (Cornerstone Research’s 2019 Midyear Assessment) and higher litigation costs.

Private companies and nonprofits have seen a mix of D&O and EPLI (Employment Practices Liability Insurance) losses, which is impacting a carrier’s book of business. Companies in California have been particularly hard hit by EPLI settlements. Age discrimination, racial bias, gender discrimination and sexual harassment lawsuits are on the rise and, in many parts of California where there is a plaintiff-friendly environment, judgments and defense costs have skyrocketed.

In the healthcare space, you’re also seeing more lawsuits from physicians alleging wrongful termination. Because of their high compensation level, judgments involving these types of suits tend to be fairly large, which directly impacts a carrier’s loss ratio.

These companies are also seeing the other types of litigation like discrimination and harassment in California (not to mention the rest of the country).  As a result, some insurance carriers have exited the California market altogether while others have revamped their underwriting processes or left certain segments of the business. Additionally, there has been a nationwide rise in wage-and-hour complaints.

Other factors impacting the market are the extent and scope of primary and excess D&O losses paid in the last year. We have seen $5 million D&O losses for private companies – an amount previously atypical for these entities. Shareholders and investors are increasingly looking at their investments more carefully, and alleging misdirection of funds or mismanagement of the company.

Consequently, D&O carriers are taking stock of an environment where for a number of years they have experienced a combined loss ratio far exceeding 100%. This is no longer sustainable with the market hardening as insurers look to get their books profitable.

What to Tell Your Insureds

In looking to secure D&O and EPLI coverage, which is often bundled together, be sure to review a carrier’s financial strength and claims-paying reputation to ensure that losses can be paid.  In addition, to help determine the appropriate limits and the right program for your insured, look at historical data for D&O and EPLI losses and claims based on the risk’s business and its operation. RPS performs a great deal of benchmarking—analyzing similar companies to help determine the amount of limits to carry.

We also recommend looking at the make-up of investors and the board and their influence when it comes to coverage purchasing decisions as well as each individual client’s risk appetite. We can also provide an evaluation of the insured’s current D&O program – assuming one is in force – using our proprietary “Heat Map” scoring system.

Communication is more critical than ever. Prepare your clients regarding the shift in the market and the renewal process. In the past, private companies and nonprofits may have seen a slight reduction in or even a flat premium. They now may see a 5% to 10% premium increase on the lower end and, for some of the more volatile markets such as healthcare, even more of a hike.

Also, it’s important to work with a specialist like RPS to go through the D&O policy renewal’s terms and conditions in detail to make sure the incumbent carrier hasn’t made any material changes that narrow the scope of coverage. We’ll help you make sure the customer is getting an apples-to-apples comparison. As a specialist, we also can help you negotiate the terms and/or explain what the differences signify for your client.

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