A hard market looms for directors and officers (D&O) liability insurance. The back end of 2018 saw a dramatic re-focus on underwriting discipline as carriers continued to combat record numbers of class actions and increasing numbers of “event” based claims, triggered from things like missed earnings, cyber breaches and sexual harassment or discrimination in the workplace.
In order to address the current ill health of their books, many carriers will be demanding higher D&O insurance premiums in 2019, according to Dr. Phil Norton, senior managing director, insurance & risk management (North America), Gallagher. Norton recently published a white paper on 2019 D&O market conditions, entitled: ‘Harder Market for D&O Arrives as Most Trends Support Concerns.’ In the report, the management liability expert outlines a number of key themes brokers should be aware of as they navigate the hardening market in 2019.
“D&O claim trends remain averse to the insurance carriers. The number of claims is increasing and there’s a backlog of claims unsettled,” Norton told Insurance Business. “However, my analysis shows that, at least temporarily, claims don’t seem to be costing more. Is that because easier claims are being settled faster, or is it because there’s a trend that the average claim size might be levelling off?
“I seem to be alone in the camp of even making the suggestion that claim severity might be levelling off, but I stand by that theory and for good reason, which is that we’re seeing more and more medium-sized companies being sued than ever before. The size of a mistake or alleged mistake that a medium-sized business can make is going to be much smaller than a Fortune 500 firm. Simply put, smaller alleged mistakes mean smaller settlements.”
Despite the potential levelling out of severity in D&O claims, insurers remain concerned about aggregate costs rising alongside the frequency of claims. In order to counteract that, they’re shifting their focus from growing market to growing profitability by raising rates, Norton explained. What that means for brokers is that they’re going to be under pressure to deliver rate increases in the range of 5% to 15%, or carriers will let someone else take the business.
“This is going to be the first year in a long time where my clients will see a rate increase, unless we do something creative,” said Norton. “By creative, we might have to change the layers in their program, the size of the layers, and the size of the retention or deductible. In some cases, the right thing to do might be to pay more money to ensure you have a rock solid D&O program with the right carrier and the right structure.”
One of the key market trends Norton has identified is that medium-severity D&O claims are on the up. He attributes this to the emergence of a new breed of plaintiff attorneys who are focused on operational and event-based claims. According to Norton, this emerging plaintiff’s bar is “wreaking havoc” for medium-sized business because the associated defense costs are proving unduly high versus historic levels.
“Event-driven claims are dramatically on the rise. They can trigger from anything like missed earnings, product-based issues and operations oriented situations, as well as claims generated from cyber breaches and sexual harassment or discrimination,” Norton commented. “If you turn back the clock 10 to 15-years-ago, these claims weren’t as clear cut. A company might have caused an environmental problem, or had allegations of sexual harassment within its workforce, but it didn’t automatically translate into a D&O claim.”
In the 2019 D&O Market Conditions whitepaper, Norton highlighted two event-based D&O claims relating to fires. The first was a claim filed against Arconic, the manufacturer of the cladding panels used to refurbish the Grenfell Tower in London, which tragically went up in flames in June 2017, resulting in 72 deaths. The second claim Norton highlighted was brought against Anadarko Petroleum Corporation after a fire at an oil tank battery on May 26, 2017, led to the shutdown of approximately 3,000 vertical wells.
The report states: “With people killed in both instances, liability suits are not unexpected, but D&O suits are historically unlikely—not so this time. We attribute the change to the newer mix of plaintiff attorneys testing D&O liability theories and expecting to be paid for their efforts as well.”
“The logic of the plaintiff attorneys is something along the lines of: the directors and officers should have had more safety protocols in place to protect from fires,” Norton commented. “In the Anadarko case for example, the plaintiff attorneys can argue: ‘If you didn’t have that fire, you wouldn’t have had the damage to the plant, you wouldn’t have had to shut down the wells, you wouldn’t have lost money, and your stock prices wouldn’t have gone down.’ They’re trying to set up this causal strategy and they’re the likely champions of these claims. These types of cases may be harder to prove, but the new plaintiff attorneys are testing the waters all the time.
“It’s important for brokers to understand this dynamic so that they can educate their clients about the changing market. We’re certainly trying to do that at Gallagher, but when it comes to a lot of the market, I don’t think they really understand the big picture at all.”