D&O liability in a challenging market in 2020

Authors: Heidi Roberts

2021 Market Conditions Report: Private & Nonprofit Sectors

Directors & Officers (D&O) liability in the U.S., as a whole, was faced with a hardening market when we started 2020. At that time, we could not predict just how much the events of the year would impact the private and nonprofit sectors, and arguably small businesses in particular.

Economic impact of COVID-19

The implications of the COVID-19 pandemic have been far-reaching, including an impact on the uncertain economy, and anticipated increases in bankruptcy filings and insolvencies. However, even if a business was deemed to be essential, the decisions of the directors and officers may be called into question. Key factors directors and officers may need to explore include the following.

  • The increased pressure on any entity's leadership during this year was paramount. Even if you made the decision to keep your doors open, it may not be business as usual and you could be at higher risk for lawsuits if, for example, ever-changing health and safety protocols were not followed.
  • There were instances where it may have been impossible to have a quorum with your board due to extenuating circumstances, resulting in higher scrutiny of the decision-makers who acted swiftly when changing business operations or making financial decisions.
  • We are still in a holding pattern as we experience daily changes in restrictions by state. So it is unclear what lawsuits will arise, but we anticipate that the frequency and severity of the allegations will significantly increase.

Small businesses adjusting to the COVID-19 impact

Although larger companies may be a bigger target for litigation, the ramifications of the far-reaching impacts of the COVID-19 pandemic impacted smaller businesses. As mentioned above, the world seemed to change day to day as COVID-19 restrictions evolved across the country. Though one may argue that smaller businesses may be more nimble, many times they may not have had the internal resources or plans to adjust.

The Paycheck Protection Program (PPP) was a new program for companies with less than 500 employees. But this program also may have introduced challenges for small business owners who may not have had the technological resources to handle the change in operations (i.e., equipping employees with technology and equipment to work from home or with personal protective equipment [PPE] when working on-site). The hospitality and retail industries come to mind when thinking of the smaller entities most impacted, and we have seen many local and mom-and-pop shops and restaurants closing their doors this year.

Market response and insurance underwriting process implications

The D&O liability markets have responded in a variety of ways to the uncertainty of 2020. In the early days of the COVID-19 pandemic, some markets provided extensions when clients could not respond, complete renewal applications or provide information in a timely manner. On some smaller accounts, they were even able to offer automatic renewal quotations.

The same market, however, may have also been faced with making decisions without much notice with the dynamic environment, including:

  • Requiring additional information aside from the typical application and financial statements, but also questionnaires regarding continuity plans, return to workplace, etc.
  • Reducing limits
  • Increasing retentions
  • Eliminating additional D&O Side A limits
  • Adding exclusions like antitrust, insolvency and communicable diseases

In addition, it became challenging to predict premium increases. Although we knew we were facing a hardening insurance market for this sector, the dramatic change in rate changes can easily be seen in the charts below.

Private & Nonprofit Sectors Chart 1
Private & Nonprofit Sectors Chart 2

Of course, some insurance underwriters also had to adjust their renewal terms if they were exiting a certain class of business, or had to get off a risk due to an increased exposure. Many markets also declined first-time buyers or even new business because they either had reached their quota, or are unsure of new entrants.

Clients have wanted to either increase limits due to increased exposure or reduce limits to save premium due to their financial constraints. Gallagher has found creative ways to reduce premium and offer alternative options since this insurance coverage is even more important to protecting the directors and officers than ever. As always, you should connect with your insurance broker and risk management team to understand the nuances of your business.

D&O claim trends with cyber and EPL

There is a longer tail on D&O claims, with insurance companies still paying out losses from claims that occurred during the previous financial downturn. Given the broad entity coverage provided under private and nonprofit policy forms, insurers often find themselves paying both more claims and more expensive claims, leading them to be especially concerned with the long tail associated with these claims. We also know that more insolvencies and bankruptcies often result in more D&O claims.

Crossover claims are also more prevalent with D&O insurance coverage, and we see this with cyber and employment practices liability (EPL) in particular.

Key cyber considerations include the following.

  • More discussions are being held with clients regarding the implications of security and privacy liability on D&O as the frequency of ransomware attacks and cyber liability claims has increased. We also see this heightened with more employees working remotely.
  • A cyber claim can cross over into D&O when there are allegations that the directors and officers did not put the proper safeguards or coverage into place.
  • There are more first-time buyers of D&O due to the heightened awareness of this insurance coverage and the fact that smaller organizations are more able to afford it.
  • Carriers have begun to add a cyber module to their management liability package to address these concerns about D&O and cyber crossover claims.

Key EPL considerations include the following.

  • The #MeToo movement and heightened awareness of social issues like discrimination have increased the likelihood of EPL insurance claims.
  • One may think that with much of the workforce working from home, EPL claims may not occur, but that is incorrect. There is decreased supervision, more furloughed or laid-off employees, and those employees who may make complaints against their employers and feel that they are retaliated against because of that.
  • EPL is a distinct and well-established coverage. We can see that decisions made by directors and officers about their workforce may be called into question and their reputation may be damaged because of it.

Looking ahead to 2021

Although COVID-19 vaccines are being developed and we are hopeful for light at the end of the tunnel, the private and nonprofit D&O insurance marketplace will most likely continue to face obstacles and more claims from the events of 2020. With uncharted territory comes more questions, higher risk for the markets and more obstacles to placing coverage. We project that, on average, there will be 10-25% rate increases for clients with minimal changes to the risk of our insureds.

Please note, a client's risk profile is the primary variable dictating renewal outcomes. Loss experience, industry, location and individual account nuances will also have a significant impact on these renewals. Many risk characteristics influence these results, such as significant changes in ratable exposure, any type of liquidity or significant debt issues, presence in California and other higher-risk areas, claims history, nature of operations, and size where they can see increases over 50%. That is why it is even more important to have discussions ahead of time, as much as possible so you can make an educated decision about this crucial coverage.

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