2019 was a continuation of the significant changes we have been witness to in the U.S. healthcare industry for the past several years, although it seems as though the frequency and severity of the changes within the industry have only accelerated. The rate of M&A activity within the sector has not subsided. In fact, the pace of transactions within the healthcare industry are at record levels, and we expect this trend to continue. The private equity sector continues to look for all healthcare M&A opportunities, and this competition for M&A is one of the driving factors leading to the higher frequency and severity of healthcare management liability claims. Not only do the actual mergers and acquisitions spawn claims alleging tortious interference and even breach of antitrust laws, but they also have residual effects after the deals are closed and the merged organizations attempt to operate as one.
The overall D&O market is being negatively impacted by events driven by D&O claims brought against executives and organization boards. No longer are D&O claims only about the financial accounting and management of the organization; we now see many D&O claims spawned from employment practices liability (EPL) or cyber liability claims. The allegations being made are that the board (and executives) did not properly prepare for and adequately assess or respond to an “event”—that event can be something completely outside the control of the board, but stakeholders and regulators are scrutinizing how the leaders of the organization could have prevented the event, or managed the event more effectively and efficiently. The result of these organizations with events claims is underwriting seeking higher D&O retentions and premiums, as well as placing restrictive endorsement language on policies to directly address these evolving types of claims.
Another major issue in healthcare is the continued heightened frequency and severity of EPL claims. Along with the #MeToo movement continuing to have a significant impact on losses, the uptick in M&A activity is a major factor in the increased frequency and severity of EPL claims. Consolidation frequently leads a redundancy of positions and reductions in staff to control expenses in order to maximize profitability. These staff reductions in force often lead to EPL litigation, and when those reductions include highly paid physicians, costs of EPL claims accelerate quickly.
The healthcare management liability sector will be more challenging, and pricing will be higher in 2020. Primary carriers are targeting double-digit premium increases on their D&O and EPL private/nonprofit renewals. Those carriers will attempt to increase EPL retentions whenever possible, particularly on organizations that have had significant employee growth or EPL claims activity. The primary D&O and EPL market capacity is growing, but not all of the capacity is being deployed on a primary basis, as some newer entrants in this space are only interested in writing excess. Excess capacity is plentiful, but several carriers have recently started to offer excess terms with limitations on coverage (such as antitrust coverage limits.) These limitations should not be accepted, as the excess market is still fairly competitive.
Coverage terms negotiations could become contentious in 2020. Some carriers are attempting to pare back coverage for antitrust and other coverage terms we have negotiated during the soft market.
Now more than ever, it’s critically important to start renewals as soon as possible, and deliver a comprehensive and professional submission to underwriters.
The information contained herein is offered as insurance industry guidance and provided as an overview of current market risks and available coverages and is intended for discussion purposes only. This publication is not intended to offer legal advice or client-specific risk management advice. Any description of insurance coverages is not meant to interpret specific coverages that your company may already have in place or that may be generally available. General insurance descriptions contained herein do not include complete insurance policy definitions, terms, and/or conditions, and should not be relied on for coverage interpretation. Actual insurance policies must always be consulted for full coverage details and analysis. Insurance brokerage and related services to be provided by Arthur J. Gallagher Risk Management Services, Inc. (License No. 0D69293) and/or its affiliate Arthur J. Gallagher & Co. Insurance Brokers of California, Inc. (License No. 0726293).