A Look at Insurance Company Professional Liability (ICPL) and D&O Liability

Authors: William Edwards, Phil Norton

Transactional Risk Webinar

For the last three years, primary insurers have proven to be fairly disciplined in their underwriting of this industry sector, namely insurance companies. Very little differentiation has been made for Employment Practices Liability (EPL), Fiduciary Liability and even Cyber Liability, as those lines of coverage showed insurance companies tracking similarly to commercial companies. However, D&O for insurance companies has been a relatively better story than its commercial counterparts, while ICPL continues to be challenging in many respects. Let us take a closer look at ICPL first.

ICPL rate changes have varied based on the risk characteristics, but for most accounts year over year increases have been nominal recently. About a decade ago, the ICPL marketplace began to shift as some carriers cut capacity or stopped writing primary. Even though premium increases were mild, there were often difficulties in building larger programs. Fast forward and capacity for ICPL remains tight, retentions have increased considerably and large premium increases for quality carriers are prevalent. The harder market for management liability definitely includes ICPL though and many carriers are now targeting ICPL renewal increases in the 10% to 30% range. Absent adverse claims development, our forecast for ICPL follows these guidelines:

ICPL Premium Increases for 2021 
Peer Group Size Typical Forecast
GWP > $1B
 10% to 30%
GWP < $1B and > $100 M 15% to 25%
GWP < $100 M
 10% to 20%

Prior policy year losses, increased claim frequency, adverse severity trends in many jurisdictions and concerns in regards to COVID related cases lead the list of reasons cited by underwriters for difficult market conditions. 

  • We think of auto claim costs in the thousands not millions, but allegations of failing to provide services to an injured party can run out of control if regulators are involved, and enforce obscure laws that may not be sensible to most people. In such cases, we have seen a single auto claim in an unfriendly regulatory state settle for up to $30 million.
  • Allegations of bad faith have always existed but severity trends on this claim category have continued to climb for several years now; this impacts the retentions available. Also causing pressure on retentions is insurance companies underwriting higher risk exposures and operating in more difficult legal environments.
  • The reason for ICPL claims occurring more frequently is difficult to ascertain – theories include more plaintiff attorneys expanding their practices as tobacco, opioids and other litigation trends abate, and of course the more recent disruption from COVID disputes.

Underwriters continue to differentiate between types of insurers as well as operating jurisdictions. This is evidenced by analyzing minimum retentions across types of insurers (Workers Compensation, Medical Malpractice, Non Standard Auto, and so forth), as well as jurisdictions.

Although insurance companies have historically made relatively good targets for plaintiff attorneys and their clients, the level of activity by the plaintiffs' attorneys has increased in the past decade. Not only has the volume of cases increased, but so has the level of sophistication in which plaintiffs' cases are brought. Meanwhile, underwriters continue to evaluate the changing legal environment in each jurisdiction and make adjustments to counter the impact on their book of business.

The distinctions between risk profiles and the associated underwriting guidelines for different risk profiles vary by carrier. Recognizing and understanding the differences between each carrier's distinctions can lead to significant benefits to the buyer. Your own risk profile remains critical as you approach the ICPL marketplace. Typical key components of your underwriting risk profile include:

  • Gross written premium
  • Claims history
  • Surplus
  • Financial strength rating
  • Legal environment in states where business is written
  • Types of insurance written
  • Product diversification
  • Geographic diversification

D&O Insurance for the Insurance Company Sector

One interesting aspect of the 2020 hardening market for D&O insurance is that the financial institutions sector in general, insurance companies and healthy regional banks in particular have fared much better than the rest of the marketplace. While 2020 saw average increases in the commercial market often topping 50%, insurance company D&O insurance renewals were most often in the 10% to 30% range. That is expected to continue throughout 2021.

Notably, financial institutions saw increases in price per $million during the financial crisis and thus are arguably starting from a higher level. However, the impact of COVID on insurance companies has been significant in some areas. For example, while D&O has been mostly unaffected, ICPL has been intensely underwritten recently, and life annuity companies are under pressure due to investment portfolio stress and elevated mortality claims. In short, clients need to strategically present their positive positions early and accurately to ensure optimal renewals.

Plaintiff Bad Faith Claims Strategies

Type of Strategy  Plaintiff Implementation
Extra-contractual Setup Demands Use of bad faith law by claimants to convert a policy purchased by the insured which has low limits of insurance into unlimited insurance coverage.
Multiple Claimants, Multiple Insureds, and Inadequate Limits Problem of accepting or rejecting a settlement for single claimant (or global-all claimants) in favor of a global (or single claimant) settlement. State laws differ as to an insurer’s duty.
Bad Faith in the Absence of Coverage
 Show that “The covenant of good faith and fair dealing has been breached even if the policy does not provide coverage”
Consent Judgments
When an insurer has issued a strong reservation of rights letter or a denial letter and the insured is facing potentially significant exposure, plaintiff attorneys can entice the insured to agree to a Consent Judgment. This results in the assignment by the insured of its rights against the carrier to the plaintiff, so that the plaintiff can pursue contractual and extra-contractual recovery from the carrier This can create substantially more favorable dynamics for the plaintiff.
Punitive Damages
 Bad faith claims are accompanied by demands for punitive damages. Since plaintiffs’ attorneys and sometimes the courts look to make an example of the insurance company and deter similar conduct in the future, punitive damages can dwarf the size of compensatory damages.
*Such strategies are not prevalent in all states / venues, but future trends are somewhat unpredictable.

Because of the highly nuanced nature of this market, it is imperative that you are working with an insurance broker who specializes in your particular industry or line of coverage. Gallagher has a vast network of specialists that understand your industry and business, along with the best solutions in the marketplace for your specific challenges.

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Disclaimer

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.

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