The Management Liability market continues to undergo significant transformations as products within the Directors and Officers Liability (D&O), Employment Practice Liabilities (EPL) and Fiduciary Liability (FL) areas are experiencing changes in coverage, limits and premiums that are impacting the broader market.
The ongoing growth in settlements for many claims, particularly in such areas as harassment, discrimination, corporate mismanagement and regulatory investigations, is pushing premiums higher. That trend requires clients to work closely with their insurance brokers to create a strategy that is both affordable and provides the necessary coverage for protection.
Throughout the last decade, we have witnessed a surge in the number of event-driven claims across multiple products. Aggressive securities and shareholder claims, unforeseen societal events from the COVID-19 pandemic, as well as social and racial injustices are main drivers. As a result, it is more critical than ever for management teams to be prepared for rapid changes by creating and consistently adhering to internal policies designed to reduce risk.
There has been an added impact on these claims from social inflation as well, specifically with D&O and EPL policies. The “Me Too” movement has effectively brought forward the important issue of workplace sexual harassment within the conscience of Americans, directly resulting in higher settlements for many lawsuits. The public’s increased scrutiny and greater media attention has further driven these record settlements.
One outcome of these trends has been a demand by clients for larger policy limits upon renewal. However as this demand has risen, supply has fallen with many carriers, which are managing their limits much more carefully. The result is a reduction in supply of high limit policies, even for businesses considered low risk. One alternative increasingly being utilized is an Excess D&O policy through a different carrier to supplement a primary D&O policy.
The shutdowns of various businesses from COVID-19 has further hardened premiums to the point where prices have doubled or tripled in cost for many products at comparable limits. Even clients with a sterling profile may need to shop policies with limit decreases and higher premiums. While factors differ for every client, companies with a healthy financial balance sheet and proven, experienced management may have more options, but there are no guarantees. Those with higher risk profiles may find it nearly impossible to purchase some policies.
All of these societal impacts – the virus, social unrest, increased litigation and settlement figures across the board – are changing the way that insurance carriers operate both now and in the future within the Management Liability area. Carriers are forced to continuously review their own financials, and may be updating their actuarial numbers to ensure financial stability. Already some carriers have pulled back from the market for various high-risk products, including within the Management Liability suite.
Part of that actuarial change may relate to redefining underwriting for specific industries; such as hospitality, retail, or other companies adversely impacted by the COVID-19 related business disruptions, as being an elevated risk. Meanwhile many small businesses across multiple industries are expected to be quoted with bankruptcy exclusions. This would exclude payment for resulting losses should the insured become financially insolvent.
The Management Liability market has also been altered by the number of new enhancements that have been made available over the last decade and are becoming popular with clients as a way to provide further protection in an environment of increasing claims. Sub-limits are also available to add on for many of these enhancements. Many carriers are automatically offering quotes with enhancements perceived to benefit a portfolio when offered, giving price conscious buyers the option to pass on such coverage to save money.
Employment Practices Liability (EPL) insurance routinely includes full third-party liability. Optional coverages for Wage & Hour (FSLA) or Immigration (IRCA) violations are available at various sub-limits. In addition, the employee definition can be broadened to include Independent Contractors.
An enhancement for Workplace Violence can cover such costs as counseling, extra security, public relations support and more, often up to $250,000 as a sub-limit. Additional third-party liability enhancements can provide coverage for expanded definitions of harassment, discrimination and similar wrongful acts. Not only will these enhancements protect the company itself, but it can help protect those that their employees interact with as well.
Wage & Hour enhancements are particularly common as claims for the miscalculation of wages or failure to pay overtime properly have grown. Compounded errors amassed over multiple years for many employees can quickly add up and basic policies won’t cover some or all of such claims. Separate standalone Wage and Hour policies are available for clients with a high employee count. IRCA is an important enhancement for companies that may hire foreign or seasonal migrant workers that provides coverage for violations of the Immigration Reform and Control Act.
Directors & Officers Liability (D&O) insurance policies can provide supplementary coverage at various sub-limits for such needs as Derivative Demand Investigation costs (only on for-profits), Additional Side-A/Non-Indemnifiable Loss, covering Employed Lawyers under the Insured Persons definition, Subpoena claims and HIPAA claims, Shareholder Dilution claims and IRS Fines & Penalties (only for non-profits).
Derivative Demand Investigation provides coverage for investigative costs of a shareholder derivative demand. Side A coverage is greatly desired as it provides direct indemnification to the directors and officers for acts in their role for which the corporate organization is not legally required to indemnify the directors and officers.
Continued interest exists for Costs of Defense Outside of Limits (DoL) added to the Management Liability policy. Outside of the per coverage part limit, this can provide up to an additional $1 million limit dedicated to the cost of defending against a lawsuit. In recent years we have seen such defense costs generally rising above the level of inflation, and these high attorney and defense fees are forcing many clients to make this enhancement a necessary part of their coverage portfolio.
Within Fiduciary Liability (FL) the following can be added on to FL policies via various sub-limits: Voluntary Settlement Programs, HIPAA, COBRA and PPACA (Affordable Care Act) claims, Disclosure Provision Penalties and Settlor Capacity claims. These policies provide greater protection to the insured as they manage and administer their company’s employee benefit plans.
Overall the Management Liability market continues to experience rapid change, requiring clients to work closely with brokers to ensure proper coverage is available. Documentation of company policies & procedures, transparent communications with employees, shareholders and other stakeholders is critical to not only reduce the likelihood of unforeseen claims, but also creating a low-risk profile that can lead to broader and more affordable policy and carrier options.
This commentary is intended to provide a general overview of the issues contained herein and is not intended, nor should it be construed, to provide legal or regulatory advice or guidance. If you have questions or issues of a specific nature, you should consult with your own risk, legal, and compliance teams.