D&O Rate Escalations and How COVID Could Make Them Even Sharper

Mounting losses, shrinking capacity, and the uncertain impact of COVID-19 will accelerate D&O market hardening.
By: | October 6, 2020

After years of abundant capital and attractive pricing, underwriters of directors and officers insurance (D&O) braced for a hardening market in 2020 — then the pandemic hit.

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COVID-19 has shaken the U.S. economy and many corporations’ finances, so it is unsurprising the D&O market has been adversely impacted. Its fate now depends on how the pandemic unfolds.

“The market was correcting itself, and on top of that came the current economic and financial crisis,” said Heather Fong Quade, deputy head of product development, financial lines, at Allianz Global Corporate & Specialty.

“The financial crisis mainly touched the banks, but this is touching everybody and every business, and it is just too early to understand its impact.”

That was the general message conveyed by D&O professionals ahead of this year’s PLUS Conference, and the result of the uncertainty has been a list of significant changes to the product available to clients — and the way insurers and brokers are selling it.

What’s Impacting Pricing

On the product front, D&O had been underpriced for years and entered the correction stage of the cycle late last year.

Heather Fong Quade, deputy head of product development, financial lines, Allianz Global Corporate & Specialty

Another factor increasing pricing has been the rise in class action claims brought against insured clients over the last several years. The #MeToo movement and greater emphasis on diversity have propelled some of the increase.

Jim Seymour, SVP at AmTrust Exec, noted the emergence of “event-based litigation” such as claims against Pacific Gas and Electric Co., stemming from the California wildfires, and against Boeing for its 737 Max issues.

“Four or five years ago, those types of claims rarely existed,” Seymour said, adding that a larger, well-funded plaintiffs’ bar now extracts larger settlement awards. He also said that before the pandemic the volume of such claims may have begun to stabilize, but uncertainty around the U.S. economy could prompt another litigation wave.

“The uncertainty is what makes the markets turbulent. If carriers know the situation is worsening, they can manage it; but with that uncertainty, it becomes more difficult for them,” he said.

Natalie Douglass, chief legal director, management liability, Gallagher, said that one out of ten public companies now face claims annually, settlements have become more severe, and the pandemic is anticipated to ramp up claims further. Significantly impacted industries, such as hospitality, entertainment and some retailers, are seeing double- and triple-digit pricing increases, she said, and policies of U.S. traded but non-U.S. domiciled companies tend to be placed in the already very expensive London market.

“Individual underwriting characteristics can also cause those pricing discrepancies; things like claim history and liquidity, which is a big focus now.”

COVID and D&O Claims

Traditional class action suits tapered between March and May, according to Christine Williams, CEO at Aon’s Financial Services Group, largely due to the lack of M&A. However, that activity has picked up and appears likely to continue into 2021. In addition, COVID-19-related filings have started to trickle in.

Williams noted a handful of public filings against companies in industries including cruise lines, early-stage biotech and banks, and claims are likely to jump over the next few years: “I see the market continuing to be challenged through 2021, because we’re only just starting to see COVID-19 filings,” she said.

Changing Dynamics 

Lower capacity limits for clients is another feature of the hardening market. Laura Coppola, global head FinPro and head casualty & FinPro North America at Swiss Re Corporate Solutions, noted the “extraordinary” capacity over the last decade, at $60 billion or more for D&O alone.

“If you had a primary D&O policy limit of $25 million with XYZ carrier just a couple of years ago, you are likely seeing that primary limit cut in half today,” she said.

Consequently, companies must rethink their insurance needs amidst the changing dynamics in the D&O market. During the financial crisis, noted Fong Quade, companies re-examined their ABC insurance towers and sometimes decided to focus D&O insurance on side-A coverage, for unindemnified insured persons such as directors and officers. They reduced or eliminated side-B coverage to reimburse companies for the employees they indemnify, and side-C coverage for the company itself.

“That’s definitely a cost-saving mechanism that private companies are now investigating,” she said. “It’s not always a good strategy, but depending on your business it may make sense.”

Given insurers new reluctance to offer B and C coverage, Williams said, Aon now is presenting clients with three or four options, each with different structures, retentions and limits. Consequently, deals have become more labor intensive for brokers and carriers and take longer to complete.

Restrictive terms are also emerging on specific policies. Seymour noted many companies today are distressed and could end up filing for bankruptcy over the next year. Some D&O carriers are uncomfortable accepting that risk, “so they’re excluding claims stemming from any sort of bankruptcy or insolvency — that’s a restrictive term that was used sparingly before,” he said.

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The hardening market has been a boon for wholesale brokers. Williams said Aon had started using wholesale brokers at the end of 2019 and continued to do so this year, providing them with some relief in the search for capacity: “They’re helpful on IPOs and some of the hard-to-place risk like cryptocurrency deals” as well as for more traditional coverage for challenged industries such as hospitality.”

Coppola noted that the hardening market has given wholesalers more opportunity to showcase their expertise in placing complex programs and, in particular, the ability to access niche, specialty markets.

Jim Rhyner, head of financial lines at The Hartford, said hard markets have become so infrequent many insurance brokers have not experienced one and are not sure how to react:

“Couple that with a remote workforce and the support a seasoned wholesaler can bring is obvious,” he said. &

John Hintze is a freelance writer who can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Scenario

The Betrayal of Elizabeth

In this Risk Scenario, Risk & Insurance explores what might happen in the event a telemedicine or similar home health visit violates a patient's privacy. What consequences await when a young girl's tele visit goes viral?
By: | October 12, 2020
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

PART ONE: CRACKS IN THE FOUNDATION

Elizabeth Cunningham seemingly had it all. The daughter of two well-established professionals — her father was a personal injury attorney, her mother, also an attorney, had her own estate planning practice — she grew up in a house in Maryland horse country with lots of love and the financial security that can iron out at least some of life’s problems.

Tall, good-looking and talented, Elizabeth was moving through her junior year at the University of Pennsylvania in seemingly good order; check that, very good order, by all appearances.

Her pre-med grades were outstanding. Despite the heavy load of her course work, she’d even managed to place in the Penn Relays in the mile, in the spring of her sophomore season, in May of 2019.

But the winter of 2019/2020 brought challenges, challenges that festered below the surface, known only to her and a couple of close friends.

First came betrayal at the hands of her boyfriend, Tom, right around Thanksgiving. She saw a message pop up on his phone from Rebecca, a young woman she thought was their friend. As it turned out, Rebecca and Tom had been intimate together, and both seemed game to do it again.

Reeling, her holiday mood shattered and her relationship with Tom fractured, Elizabeth was beset by deep feelings of anxiety. As the winter gray became more dense and forbidding, the anxiety grew.

Fed up, she broke up with Tom just after Christmas. What looked like a promising start to 2020 now didn’t feel as joyous.

Right around the end of the year, she plucked a copy of her father’s New York Times from the table in his study. A budding physician, her eyes were drawn to a piece about an outbreak of a highly contagious virus in Wuhan, China.

“Sounds dreadful,” she said to herself.

Within three months, anxiety gnawed at Elizabeth daily as she sat cloistered in her family’s house in Bel Air, Maryland.

It didn’t help matters that her brother, Billy, a high school senior and a constant thorn in her side, was cloistered with her.

She felt like she was suffocating.

One night in early May, feeling shutdown and unable to bring herself to tell her parents about her true condition, Elizabeth reached out to her family physician for help.

Dr. Johnson had been Elizabeth’s doctor for a number of years and, being from a small town, Elizabeth had grown up and gone to school with Dr. Johnson’s son Evan. In fact, back in high school, Evan had asked Elizabeth out once. Not interested, Elizabeth had declined Evan’s advances and did not give this a second thought.

Dr. Johnson’s practice had recently been acquired by a Virginia-based hospital system, Medwell, so when Elizabeth called the office, she was first patched through to Medwell’s receptionist/scheduling service. Within 30 minutes, an online Telehealth consult had been arranged for her to speak directly with Dr. Johnson.

Due to the pandemic, Dr. Johnson called from the office in her home. The doctor was kind. She was practiced.

“So can you tell me what’s going on?” she said.

Elizabeth took a deep breath. She tried to fight what was happening. But she could not. Tears started streaming down her face.

“It’s just… It’s just…” she managed to stammer.

The doctor waited patiently. “It’s okay,” she said. “Just take your time.”

Elizabeth took a deep breath. “It’s like I can’t manage my own mind anymore. It’s nonstop. It won’t turn off…”

More tears streamed down her face.

Patiently, with compassion, the doctor walked Elizabeth through what she might be experiencing. The doctor recommended a follow-up with Medwell’s psychology department.

“Okay,” Elizabeth said, some semblance of relief passing through her.

Unbeknownst to Dr. Johnson, her office door had not been completely closed. During the telehealth call, Evan stopped by his mother’s office to ask her a question. Before knocking he overheard Elizabeth talking and decided to listen in.

PART TWO: BETRAYAL

As Elizabeth was finding the courage to open up to Dr. Johnson about her psychological condition, Evan was recording her with his smartphone through a crack in the doorway.

Spurred by who knows what — his attraction to her, his irritation at being rejected, the idleness of the COVID quarantine — it really didn’t matter. Evan posted his recording of Elizabeth to his Instagram feed.

#CantManageMyMind, #CrazyGirl, #HelpMeDoctorImBeautiful is just some of what followed.

Elizabeth and Evan were both well-liked and very well connected on social media. The posts, shares and reactions that followed Evan’s digital betrayal numbered in the hundreds. Each one of them a knife into the already troubled soul of Elizabeth Cunningham.

By noon of the following day, her well-connected father unleashed the dogs of war.

Rand Davis, the risk manager for the Medwell Health System, a 15-hospital health care company based in Alexandria, Virginia was just finishing lunch when he got a call from the company’s general counsel, Emily Vittorio.

“Yes?” Rand said. He and Emily were accustomed to being quick and blunt with each other. They didn’t have time for much else.

“I just picked up a notice of intent to sue from a personal injury attorney in Bel Air, Maryland. It seems his daughter was in a teleconference with one of our docs. She was experiencing anxiety, the daughter that is. The doctor’s son recorded the call and posted it to social media.”

“Great. Thanks, kid,” Rand said.

“His attorneys want to initiate a discovery dialogue on Monday,” Emily said.

It was Thursday. Rand’s dreams of slipping onto his fishing boat over the weekend evaporated, just like that. He closed his eyes and tilted his face up to the heavens.

Wasn’t it enough that he and the other members of the C-suite fought tooth and nail to keep thousands of people safe and treat them during the COVID-crisis?

He’d watched the explosion in the use of telemedicine with a mixture of awe and alarm. On the one hand, they were saving lives. On the other hand, they were opening themselves to exposures under the Health Insurance Portability and Accountability Act. He just knew it.

He and his colleagues tried to do the right thing. But what they were doing, overwhelmed as they were, was simply not enough.

PART THREE: FALLING DOMINOES

Within the space of two weeks, the torture suffered by Elizabeth Cunningham grew into a class action against Medwell.

In addition to the violation of her privacy, the investigation by Mr. Cunningham’s attorneys revealed the following:

Medwell’s telemedicine component, as needed and well-intended as it was, lacked a viable informed consent protocol.

The consultation with Elizabeth, and as it turned out, hundreds of additional patients in Maryland, Pennsylvania and West Virginia, violated telemedicine regulations in all three states.

Numerous practitioners in the system took part in teleconferences with patients in states in which they were not credentialed to provide that service.

Even if Evan hadn’t cracked open Dr. Johnson’s door and surreptitiously recorded her conversation with Elizabeth, the Medwell telehealth system was found to be insecure — yet another violation of HIPAA.

The amount sought in the class action was $100 million. In an era of social inflation, with jury awards that were once unthinkable becoming commonplace, Medwell was standing squarely in the crosshairs of a liability jury decision that was going to devour entire towers of its insurance program.

Adding another layer of certain pain to the equation was that the case would be heard in Baltimore, a jurisdiction where plaintiffs’ attorneys tended to dance out of courtrooms with millions in their pockets.

That fall, Rand sat with his broker on a call with a specialty insurer, talking about renewals of the group’s general liability, cyber and professional liability programs.

“Yeah, we were kind of hoping to keep the increases on all three at less than 25%,” the broker said breezily.

There was a long silence from the underwriters at the other end of the phone.

“To be honest, we’re borderline about being able to offer you any cover at all,” one of the lead underwriters said.

Rand just sat silently and waited for another shoe to drop.

“Well, what can you do?” the broker said, with hope draining from his voice.

The conversation that followed would propel Rand and his broker on the difficult, next to impossible path of trying to find coverage, with general liability underwriters in full retreat, professional liability underwriters looking for double digit increases and cyber underwriters asking very pointed questions about the health system’s risk management.

Elizabeth, a strong young woman with a good support network, would eventually recover from the damage done to her.

Medwell’s relationships with the insurance markets looked like it almost never would. &

Bar-Lessons-Learned---Partner's-Content-V1b

Risk & Insurance® partnered with Allied World to produce this scenario. Below are Allied World’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

The use of telehealth has exponentially accelerated with the advent of COVID-19. Few health care providers were prepared for this shift. Health care organizations should confirm that Telehealth coverage is included in their Medical Professional, General Liability and Cyber policies, and to what extent. Concerns around Telehealth focus on HIPAA compliance and the internal policies in place to meet the federal and state standards and best practices for privacy and quality care. As states open businesses and the crisis abates, will pre-COVID-19 telehealth policies and regulations once again be enforced?

Risk Management Considerations:

The same ethical and standard of care issues around caring for patients face-to-face in an office apply in telehealth settings:

  • maintain a strong patient-physician relationship;
  • protect patient privacy; and
  • seek the best possible outcome.

Telehealth can create challenges around “informed consent.” It is critical to inform patients of the potential benefits and risks of telehealth (including privacy and security), ensure the use of HIPAA compliant platforms and make sure there is a good level of understanding of the scope of telehealth. Providers must be aware of the regulatory and licensure requirements in the state where the patient is located, as well as those of the state in which they are licensed.

A professional and private environment should be maintained for patient privacy and confidentiality. Best practices must be in place and followed. Medical professionals who engage in telehealth should be fully trained in operating the technology. Patients must also be instructed in its use and provided instructions on what to do if there are technical difficulties.

This case study is for illustrative purposes only and is not intended to be a summary of, and does not in any way vary, the actual coverage available to a policyholder under any insurance policy. Actual coverage for specific claims will be determined by the actual policy language and will be based on the specific facts and circumstances of the claim. Consult your insurance advisors or legal counsel for guidance on your organization’s policies and coverage matters and other issues specific to your organization.

This information is provided as a general overview for agents and brokers. Coverage will be underwritten by an insurance subsidiary of Allied World Assurance Company Holdings, Ltd, a Fairfax company (“Allied World”). Such subsidiaries currently carry an A.M. Best rating of “A” (Excellent), a Moody’s rating of “A3” (Good) and a Standard & Poor’s rating of “A-” (Strong), as applicable. Coverage is offered only through licensed agents and brokers. Actual coverage may vary and is subject to policy language as issued. Coverage may not be available in all jurisdictions. Risk management services are provided or arranged through AWAC Services Company, a member company of Allied World. © 2020 Allied World Assurance Company Holdings, Ltd. All rights reserved.




Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]