How M&A has impacted the hard D&O insurance market

How M&A has impacted the hard D&O insurance market | Insurance Business America

How M&A has impacted the hard D&O insurance market

The current directors & officers (D&O) liability insurance market was described by one executive at a recent Wholesale & Specialty Insurance Association (WSIA) U40 group webinar as being “like nothing we’ve ever seen” before.

Mike Smith, president and CEO at Axis Insurance Services, was referring to the hard market conditions, the likes of which he said haven’t been seen since the 1980s – long before the WSIA U40 members started their professional careers.

“As an industry, we’ve gotten used to looking at the D&O pricing as cheap, with D&O underwriters giving coverages away, etc.,” said Smith. Referring to the current hard market for D&O insurance, he added: “We really haven’t [yet] gotten into a position where the pricing is where it’s ultimately going to be. And in most cases, as a broker, we’re seeing sticker shock all the way across the board.”

There are multiple factors driving hard market conditions for D&O insurance. One factor highlighted by several insurance leaders was mergers and acquisitions (M&A).

Paul Bunone, vice president at AmtrustEXEC, commented: “A couple years ago, before the market really got hard, merger objection claims came to the forefront. They weren’t a big deal previously, but they started becoming a big deal. This was addressed quickly [by insurers] with higher retentions […] specific to merger objection claims. Now, retentions are high enough that I don’t know if that’s a factor anymore, but that’s how that was dealt with.”

The AmtrustEXEC VP then described a new trend where merger objection claims are now being filed on an individual basis because the class action lawsuits that the plaintiff firms were filing were starting to come under scrutiny for being used as a way for plaintiffs to get fees.

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He gave the example of a merger objection claim on a tiny public company, which was settled with a $60,000 payment to the plaintiff firm, but the shareholders received nothing except a promise from the company that they would do more due diligence the next time they got sued.

“So, it’s that kind of thing […] where merger objection claims are being filed on an individual basis rather than a class action basis – they’re not [as] big a deal,” Bunone commented. “They are easily dealt with, and I don’t think they’re that much of a hard market factor.”

One factor that has always played a part in the severity of M&A-related D&O claims, according to Bunone, is the misrepresentation (either wilfully or inadvertently) of a company’s value. That’s “always been the case,” and likely always will be.

He said: “On both the private and public company side, the biggest factor is: if company A acquires company B and then finds out four months later that company B lied about the prospects of their financials, that’s a serious D&O claim.”

 Meanwhile, Javier Gonzalez, executive vice president of sales at PL Risk Advisors, said the “significant increase” in M&A activity over the past five years has had an inevitable impact on the D&O market, with more deals driving heightened claim activity – especially on the private company side.

“With that, whether it’s private equity, venture capital or other institutional investors that require D&O insurance, there’s going to be more complex transactions, more attorneys involved, and there’s obviously a higher opportunity for an error to occur or for somebody to be upset about a decision that was made based on valuation or terms and conditions etc.,” said Gonzalez.

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The same, he said, is happening in the representations and warranties (R&W) insurance market, where there are now more sophisticated investors, more attorneys involved, and more eyes scrutinizing each and every deal, thus creating higher exposure to errors, omissions and misrepresentations.  

Gonzalez commented: “I see a lot of the M&A claims bleeding into the R&W policy - whether it’s misrepresentation of financials [or] misrepresentations of vendor relationships, client contracts, vendor contracts. We’re also seeing - whether it’s healthcare, or some of the other specific industries – an increase in antitrust [lawsuits] or tortious interference and [accusations of] unfair business practices.

“One other item is that there are more plaintiff attorneys realizing how broad D&O policies can be […] and how much you can actually have covered within it, even if it’s not directly a D&O event. We’ve gotten to a point where we have brokers coming to us with a claim which looks clear as day to be an E&O claim, but they’re filing it with the D&O carriers as well [because] they get 100% duty to defend, and they’re probably going to find some crossover coverage they weren’t expecting.”