COVID-19 Stirs Up an Already Murky Outlook for D&O; Industry Experts Weigh In

When it comes to COVID-19 economic damage, some industries have been hit much harder than others. D&O underwriters are sure to be asking COVID-19-specific questions at renewals.

By: Jonathan McGoran | April 16, 2020

Well before the current coronavirus pandemic, the D&O marketplace was hardening.

Now, a pair of coronavirus-related class action lawsuits, one against a pharmaceutical manufacturer and one against a cruise ship line, may herald a wave of D&O litigation. Combined with the economic slowdown caused by the pandemic, this could mean a D&O marketplace that’s even tougher than anticipated.

“Coming into January, we knew we were going to be looking at potentially less capacity in the D&O marketplace,” said Christine Williams, CEO at Aon Financial Services Group.

“I think that trend’s now going to continue. You have insurers who are just managing their aggregate capacity, whether it’s in the U.S., London or Bermuda. That’s something we were worried about January 1, and we’re probably a little bit more worried now, because we do suspect that insurers are going to move away from certain classes of business.”

Renewals and Exclusions to Prep For

Rob Yellen, D&O and fiduciary liability insurance product leader with Willis Towers Watson, agrees: “Renewals this year are largely going to be difficult.

Rob Yellen, fiduciary liability products leader, Willis Towers Watson

“We were in an already firming D&O market, with pressure on rates and insurers pulling back on the amount of capacity they would extend to D&O,” Yellen explained. “There was already enormous pressure on companies for this year’s renewal, and now we have COVID-19 on top of it. It didn’t cause it, but it made it worse.”

One consequence of this could be a broadening of exclusions.

“Up until the last few months, D&O generally has been so competitive that if you were to put some types of exclusions on, you would be effectively taking yourself out of competition for that account, because there would be so many alternatives available,” said Kevin LaCroix, executive vice president at RT Specialty’s RT ProExec division.

“However, the marketplace was already tightening significantly before the coronavirus outbreak, and now with the disruption of the coronavirus, restrictions that might not have flown in the past may now be unavoidable.”

Williams expects that those exclusions may be directly focused on COVID-19.

“I do think there are going to be insurers that are going to try to put on COVID exclusions, which could be very broad,” he said.

“I don’t think anybody’s going to be looking to change the breadth of the traditional coverage that you get under a D&O policy, but I do think it’s going to be more challenging for certain insureds, and that’s going to continue for the next few months.”

So far, though, Yellen hasn’t seen those exclusions: “We’re not really seeing D&O insurers looking to exclude COVID-19,” he said.

“Some carriers have asked in a specific context, but we haven’t seen anything stick that has a specific COVID-19 exclusion. But we have seen concerns about liquidity. There is a lot of pressure on carriers not to pick up the next bankruptcy if they can avoid it.”

Individual Industries Take the Hardest Hits

Impacts could vary greatly by industry.

Kevin LaCroix, EVP, RT ProExec division, RT Specialty

“We’ve already seen that, as a result of the disparate impact on different kinds of companies … different sectors have become more suspect,” said LaCroix.

“Airlines, hotels, casinos, cruise lines, movie theaters, restaurants chains — there are a number of industries that are being disproportionately impacted by this, although obviously there are some industries that are doing better — teleconferencing services, Campbell soup, Amazon. So it’s playing out differently in different segments of our economy. The underwriters are very aware of that, and that has changed how they are responding to submissions depending on industry.”

That said, the impacts may still be broad. “Everybody’s going to have exposure,” said Williams. “No one’s going to be immune.”

A Silver Lining?

Still, for many insureds, the pandemic won’t make things worse than they were already poised to be.

“Luckily, so far we have seen few knee-jerk reactions from insurers,” Yellen said.

“They seem to be looking at things on a case-by-case basis. For some accounts, the change year-over-year won’t be out of line with last year’s projections, compared to those that have been impacted, [like] targeted segments, companies exposed to liquidity concerns or indirectly targeted, those with supply chains impacted or who face issues downstream.”

But as impacts of the slowdown spread to more industries, insurers could become more broadly concerned. “You might also see that with the bankruptcy situation, certain vendors declare bankruptcy and that may have a cascading effect,” said Yellen.

“It’s not just the cruise lines, but all their suppliers and vendors.”

Conducting Business in COVID-19’s Wake

The coronavirus may also impact how insurers do business.

“Several D&O insurers have introduced COVID-19 questionnaires, asking about the company’s response to the coronavirus and how it’s impacting their operations,” said LaCroix.

“And I expect that to continue. I expect it to become more widespread, and I suspect there will be a lot more financial underwriting as underwriters seek to determine whether a company that in the past may have been financially solid may become financially weaker and even an insolvency candidate as a result of cash flow interruptions, things like that.”

Brokers and insureds may have to change their approach, as well.

“I think it’s going to be increasingly difficult to build a large program of $500-$600 million of full ABC coverage,” said Williams. “You have insurer capacity potentially going out of the market and not enough capacity coming in. So I think the ways the programs are structured are going to be looking different.”

Williams also sees an increase in more creative program structures.

“Insurers will be asking for clients to have more skin in the game, particularly on retention,” Williams said. “Co-insurance is something else that we’ve been seeing and an exploration of captives and reinsurance for some larger deals.”

For the moment, most companies should be well covered by their current D&O policy.

“We’ve been in a competitive marketplace for really 20 years or close to it,” said LaCroix.

“And during that time, competition has broadened the scope of coverage, narrowed the exclusions, made the terms and conditions relatively more policyholder-friendly than before.

“So the potential good news is, for many organizations that might experience a D&O claim, if they had D&O cover in place, they’re going to have relatively broad cover to respond, including relatively broad entity liability coverage,” he said. “So just as a general matter, I think many companies will be able to turn to their D&O coverage for protection in the event of a D&O claim arising out of this, but ultimately the insurance companies will make their coverage determinations based on the policy wording and facts and circumstances of each claim.”

But Yellen advises that how insureds handle claims now could help or hurt them at renewal time.

“The bigger challenge is not how to change their business or resolve the financial challenges, the bigger issue is how do you tee yourself up for renewal, how do maximize the value of your insurance?” said Yellen.

“And that means understanding when you have a claim against you. Today’s D&O products are really well refined and broad and may encompass things you may not expect. It may trigger obligations under the policy that, if not met, could jeopardize coverage not just for the claim in question, but also going forward.” &

Jon McGoran is a magazine editor based outside of Philadelphia. He can be reached at [email protected].

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.