What's critical in mitigating COVID-related D&O risks?

What's critical in mitigating COVID-related D&O risks? | Insurance Business

What

It’s the same story in every “Market Outlook Report” – the management liability market is under severe stress. Rates are going up in private company, public company and non-profit directors’ and officers’ insurance, and the COVID-19 pandemic is only hastening the pace of change.    

“Overall, the D&O market continues to harden,” said Dominic Corigliano (pictured), vice president at IronPro®, the professional lines division of Ironshore. “Many carriers are continuing to cut capacity and re-evaluate terms in response to unfavorable portfolio development in a depressed rate environment, as well as the COVID-19 pandemic. Rates and retentions continue to be on the rise in both private company, non-profit and public D&O.”

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There has been growing pressure for rate momentum in D&O insurance for the past few years. To some extent, it’s a natural and necessary shift from a 10+ year-long soft market in which there was an oversupply of capacity and coverage. In more recent years, there has been a significant uptick in securities class actions and a corresponding surge in litigation funding – furthered by the trend of social inflation – which has increased the frequency and severity of D&O claims, thus causing insurers to review their books, restrict capacity and tighten up their underwriting guidelines.

The COVID-19 pandemic has only exacerbated existing problems in the D&O marketplace. It has crippled economies worldwide, placing huge financial stress on companies and creating more risk of bankruptcy, especially among companies that were financially weak heading into the pandemic. It has also placed greater onus on companies to disclose their strategies for responding to COVID-19 and forecasting how their business will perform. Businesses that fail to meet the expectations of shareholders, employees and other key stakeholders could well find themselves on the receiving end of litigation alleging misrepresentation or inaccurate disclosure.

“One of the chief concerns for D&O carriers, relative to the pandemic, is the financial stress inflicted upon businesses from prolonged shutdowns,” Corigliano told Insurance Business. Some industries have fared better than others. The construction industry, for example, largely reopened by the Fall and is therefore recovering faster than some service-based, more transactional industries.

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The true picture of the pandemic’s impact on management liability lines will not be known for some time. Corigliano explained: “Being that management liability lines are long-tail, we may expect to see claims lagging behind occurrences or actions as the pandemic continues on. Some trends we are concerned about relate to financial stress/bankruptcy risk, layoffs or furloughs of employees, and employees concerned over coming back to work due to infection risk.”

There are plenty of actions that companies can take to mitigate some of these risks. To relieve financial stress, companies might be able to extend out their credit maturities or seek out additional lines of credit to see them through the crisis. As for employee layoffs and furloughs, companies can seek legal assistance and also make use of the free resources made available by the US Department of Labor. Protecting employees and addressing their concerns is also “critical to the success of any business during this time,” Corigliano added. Again, companies can turn to the guidelines provided by the Centers for Disease Control and Prevention (CDC) to ensure they’re following best practices.

But the one thing of utmost importance at this time is strong communication, according to Corigliano. He commented: “In professional lines, communication to shareholders, employees, suppliers and other key stakeholders is absolutely essential. Companies need to share what protocols and procedures they’re putting in place in order to protect their employees and their shareholders. It’s one of the key elements in helping to mitigate COVID-19 risk.”