August 7, 2020
The Directors and Officers insurance marketplace, for the first time in over 10 years, is in turmoil from both a price and coverage standpoint.
This type of insurance has been the bedrock of protection for many years in the publicly held company sector. These companies regularly experience securities claims from issues alleging mismanagement and causing shareholders value to drop.
An important element here is the liability that can visit directors and/or officers, and the fact that most state statutes make directors and officers personally liable for their actions, putting them in great financial peril.
Also, private company D&O policies have been placed with many insurers for a number of years. The D&O policy is very broad in its protection. Many purchasers in the private sector buy it as a “peace of mind from worry and anxiety” solution to help lessen company risk issues.
The reasons are: closely held family disputes; action from outside investors, lenders and competitors; and, potential acquirers of privately held companies. The insuring agreement literally protects insureds against “any act, error, omission, statement, mis-statement, failure to act or misleading statement.” Some carriers use “any actual or alleged breach of duty, or neglect in carrying out corporate duties.”
However, insurers will place limitations or exclusions to these coverage grants which diminish protections. These coverage “takeaways” have done little to decelerate the plaintiff’s bar from filing lawsuits followed by successful judgements or dispute resolutions.
THE CHANGING D&O LANDSCAPE
Two major contributors to the sudden change in pricing and coverage are the emergence of pandemic issues and “nuclear judgments” on behalf of the plaintiffs, especially in the publicly held company sector.
Insurance carriers may use four strategies which diminish protection:
CORONAVIRUS UNKNOWNS AND WEAK FINANCIALS
As mentioned, insurers are very focused on exposure to the fallout from COVID-19 and the difficult financial environment it has created. Carriers are looking at liquidity/solvency, guidance and disclosures, revenue disruption, supply chain and logistical concerns and business plan changes. They also really want to know if you can operate your business remotely and successfully.
Here are some underwriting questions to expect:
1. Business Continuity Plans (BCP):
OTHER UNDERWRITING ISSUES
Bankruptcy/Insolvency – The current environment could result in waves of bankruptcies. For companies facing restructuring or bankruptcy, D&O coverage is especially valuable. While valuable to the policyholder, this creates concern for the underwriter/carrier.
Private and Not-for-Profit Companies – A client’s financial health and industry sector matter. Financially distressed firms, companies in challenged or emerging industries will see premium increases, higher deductibles and/or coverage restrictions. Portfolio companies of private equity firms may see greater underwriting scrutiny and pressure.
THIS IS A CALL TO ACTION
It is imperative that the client answer the aforementioned questions as thoroughly as possible and provide supporting materials. Failure to do so could result in non-renewal, less favorable terms and conditions and/or significant price increases.
At The Fedeli Group, we are committed to helping you work through these issues and answer any questions on your renewal, or the purchase of this valuable protection.
Please call our Directors & Officers consultants: Keith Hartzell, Tim Moroney or Ed Kraine at 216-328-8080 for a more in-depth analysis of your needs.
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