A Hard D&O Market Has New Meaning In The
What Can Policyholders Expect?
All roads appear to be pointing to the near future that could likely bring broad and unavoidable COVID-19 exclusions in professional liability and liberally applied (or even blanketed) bankruptcy/creditor/downsizing exclusions by the few carriers left willing to provide terms.
The end result? Investors and prospective board members requiring greater protection while policyholders desperately seek insurance only to find expensive, coverage-compromised options. In a worst-case scenario, it could mean a near-complete coverage moratorium on all new business. Here’s what most policyholders can expect in the immediate future:
Stable renewals: Companies with stable financials, no current losses/litigation, and no increase in risk are likely to encounter above-average premium increases (averaging 20-40%) combined with more restrictive terms and fewer options when remarketing coverage. Those looking to increase policy limits are also likely to encounter greater resistance. All policyholders should be prepared to complete COVID-19 questionnaires surrounding their risk management strategy in response to the pandemic.
Higher risk renewals: Companies with any increase in risk factors such as; distressed financials, current litigation, and those operating in higher-risk industries, will, at best, encounter significantly increased premiums (which can exceed 100%) combined with very aggressive and unavoidable exclusions. In worst-case scenarios, some companies may be left with no renewal options, forcing only the ability to purchase extended reporting provisions at renewal, leaving claims arising from future alleged wrongful acts entirely uninsured. Product lines most at risk of non-renewal are companies’ Side A Towers.
First-time buyers: Companies seeking first-time professional and management liability are already encountering a smaller market and higher premiums than just 4-5 months ago and that is only going to get progressively worse with some companies having few to no options. In addition to COVID-19, insolvency, and downsizing exclusions (among others), first-time buyers may also experience greater resistance in securing coverage for prior acts when purchasing management liability. In addition to COVID-19 questionnaires, first-time purchasers (particularly newer ventures) should also be prepared for an aggressive analysis of their financials and should be ready to explain how they will meet their financial obligations over the next 12 months.
Even in a perfect world where a vaccine is discovered tomorrow, the underwriting landscape is not likely to improve any time soon. Due to the statute of limitations and the fact that the discovery of prior wrongful acts can take considerable time, it’s likely that many of these policy exclusions are here to stay for a while. When navigating this environment, directors and officers may need to think outside the box. When policy premiums are cost-prohibitive, executives may need to consider increased retentions, scaling coverage back from full D&O insurance to Side A only (when available), and/or individual director liability policies if/when organizations are unable to secure coverage. It’s paramount, however, that executives don’t make the mistake of non-renewing their insurance in spite of increased premiums.
The concerns and actions of both sides are justifiable. Given the almost guaranteed increase in future claims, underwriters are right to be concerned as well as corporate officers in seeking coverage. As a broker assisting policyholders given these future unknowns, the best advice we can provide executives at the moment is, shop aggressively, inspect terms extremely carefully (with an experienced broker and counsel), and negotiate aggressively. For companies with distressed financials, some steps can be taken when attempting to navigate insolvency exclusions.
Lastly, for all companies considering increased policy limits, broader terms, or first-time coverage, we advise the C-suite to act on those requests today as though tomorrow doesn’t exist. While some may dismiss this outlook as being exaggerated, and we surely hope the future is rosier than current trends may project, there is surely no advantage at the moment for directors to delay in taking action when addressing their insurance.