Directors and officers should plan to add one more stressor to their likely full plates in 2021; their director and officer (“D&O”) insurance renewal. The outbreak of the COVID-19 pandemic has exacerbated the already hard D&O insurance market, with insurers increasing their pricing and reducing capacity offered.[1] In light of this, D&O coverage may become even more important for commercial buyers in 2021, as companies and their officers grapple with a tumultuous litigation environment.
D&O insurance is a type of liability insurance that insulates directors and officers from claims made against them while serving on a company’s board and also protects a company in the event they are sued.[2] D&O insurance is available for any director or officer in a for-profit or not-for-profit company.[3] Overall, D&O insurance is advantageous because it can pay for defense, settlement and verdict costs for claims, on the directors’ behalf and cover the company’s liability in the event they are sued by their shareholders and the claim is within the terms of the policy.[4] D&O insurance is applicable to an array of possible claims outside of traditional fiduciary and shareholder claims. This notion is supported by brokerage firm Marsh & McLennan who commented in their 2020 D&O series, that the “need for D&O insurance is not just a public issue where there is a threat of shareholder action.”[5]
An Extraordinary Time to be a Director or Officer
Prior to COVID-19, directors, officers, and senior executives, were already in the midst of a litigious environment spurred by securities class actions, sexual harassment #MeToo suits, and other forms of alleged misconduct.[6] Allianz, a leading global insurance company, commented in their 2019 Year End Report that they anticipated an increase in claims against directors and officers arising from “event driven litigation;” such as non-financial or fiduciary events, including corruption, cyber-attacks, environmental disasters and product problems.[7] Allianz’s competitor Swiss Re elaborated on this idea of event-driven litigation by commenting that the insurer expects to see an increase in headline driven litigation following the #MeToo movement and breach of legal duties.[8] We can also add the COVID-19 pandemic to the list of possible claims that are expected to be on the rise from an event driven litigation standpoint.[9]
As evidence of the unprecedented times D&O’s face today, 2019 saw 428 class action securities cases filed in US state and federal courts[10] and many settlements breached over $100 million.[11] Additionally, settlement amounts for sexual harassment have tended to be even greater as evidenced by Signet Jewelers’ most recent #MeToo settlement. Signet settled their class action security lawsuit for the #MeToo allegations in May of this year for $240 million and their D&O insurance is expected to fund $200 million of the settlement.[12] However, because of the COVID-19 pandemic, virtual working environment, economic downturn and return to work policies, companies should expect to pay even more for their D&O insurance as new challenges arise that present breeding grounds for potential claims.[13]
This uptick in COVID-19 event driven litigation against directors and officers is evidenced by two securities class actions that were filed early in the wake of COVID-19 against a cruise line operator and pharmaceutical company.[14] Norwegian Cruise Line was sued for making false and misleading statements about COVID-19 in an effort to generate cruise sales.[15] Similarly, Inovio Pharmaceuticals was sued because of false statements made by the company’s CEO regarding the development of a COVID-19 vaccine.[16] Both suits involved public disclosure by companies of statements on the topic of COVID-19 and are two cautionary tales for companies in all industries to be mindful when making any COVID-19 statement.[17] Misleading company disclosures or corporate mismanagement surrounding COVID-19 are new kinds of event-driven litigation that may be covered under a D&O policy depending on the circumstances of the claim and terms and conditions of the policy.[18] Moreover, the risks that D&O’s face today need to be considered in light of current D&O insurance market conditions.
How’s the D&O Market? Hard
A hard market existed even before the COVID-19 pandemic; however the reality is that the market is worsening and many clients may struggle to navigate an even more challenging insurance landscape in 2021, while still meeting their corporate insurance objectives.[19] The insurance market is cyclical and a hard market occurs when premiums increase and capacity conversely decreases.[20] Essentially, the hard market is a seller’s market. The insurance industry is coming off of many years of being in a soft market, during which many clients benefited from favorable premiums and abundant capacity.[21] However, insurance companies are now driving double digit premium increases for insurance policy limits offered, following years of being in a buyer’s market, coupled with large industry losses, social inflation in damage awards and uncertainties surrounding COVID-19.[22]
Insurance companies want to ensure they recoup costs following the soft market and insulate themselves in the likely event that a director or other executive is sued and turns to their D&O insurance policy for payment.[23] While this is a savvy and sound business tactic for the insurance company, it ultimately means bad news for the client who is faced with paying more for insurance limits. For US public companies, the average premiums for D&O coverage increased 59% at the end of Q2 2020 and this pricing trajectory is expected to continue.[24] Additionally, brokerage firm Aon indicted that in light of the premium increases being pushed by the markets, many clients were forced to change their limit and deductible structures to offset costs.[25] Thus, in some instances clients are paying more for less D&O insurance coverage, compared to what they may have paid in the past.
2021 D&O Insurance Renewals
In the wake of COVID-19 and the increasingly litigious environment, many insurers are expected to be very cautious with policy limit deployment for D&O coverage going forward.[26] Company executives need to understand possible COVID-19 impacts on their business and their management decisions surrounding COVID-19 in order recognize how their insurance coverage may be impacted by both.[27] Furthermore, policy terms and conditions may exclude COVID-19 specific events.[28] Because of these factors, company leaders should be nimble and balance their cost priorities, evaluate their risk tolerance level and understand the reality of D&O market conditions. Overall, companies need to be prepared for an even more challenging renewal cycle.
Insurance brokers are encouraging their clients to be proactive with their D&O renewals, prepare for changes, and understand the fluidity of the market and further premium price pressure in the wake of COVID-19.[29] Companies should be prepared for difficult decisions between scaling back limits purchased due to cost or purchasing expiring limits at much higher premium costs.[30] Budget and cost pressure are likely to be at the forefront of the renewal decision, which may necessitate alternative options to traditional direct insurance.
Because of rising premiums, some companies are exploring off-shore captive insurance companies for coverage whereas others are considering non-renewing their D&O insurance all together and self-insuring against possible liability.[31] Effectively, by non-renewing their D&O insurance policies, companies eliminate high premium spend, which frees up capital to be used and invested elsewhere in the company. Tesla is one company that took the approach of non-renewing their D&O policy limits.[32] In April of this year, Tesla’s CEO Elon Musk announced that would non-renew their insurance policies and claimed “disproportionate high premiums quoted by insurance companies” was the basis for the decision to self-insure.[33]
Conclusion
These are unprecedented times, companies and their directors are likely to encounter D&O claims from a variety of sources, now including COVID-19 related impacts. Companies should recognize the challenging environment and expect to continue to feel the effects of the D&O hard market well into 2021. D&O insurance coverage might be the most important insurance coverage and premium spend companies make in 2021.
[1] Marsh & McLennan Companies, COVID-19 Pandemic Adds to Rate Pressure for D&O Buyers,
https://coronavirus.marsh.com/us/en/insights/research-and-briefings/covid-19-adds-rate-pressure-directors-officers.html (last visited Oct. 10, 2020).
[2] Directors and Officers (D&O) Liability Insurance, Int’l Risk Mgmt. Inst. https://www.irmi.com/term/insurance-definitions/directors-and-officers-liability-insurance (last visited Oct. 10, 2020).
[3] Id.
[4] Julie Kagan, Directors and Officers Liability Insurance, Investopedia (Nov. 7, 2019), https://www.investopedia.com/terms/d/directors-and-officers-liability-insurance.asp.
[5] Marsh & McLennan Companies, Is D&O Insurance Now the Most Important Cover You Can Have?, Marsh Com. (July 16, 2020), https://www.marshcommercial.co.uk/articles/directors-and-officers-series-three/.
[6] See Denise Johnson, Corporate Culture, Cyber Risk Are Top of Mind for D&O Underwriters, Ins. J. (Jan. 21, 2019), https://www.insurancejournal.com/news/national/2019/01/21/511042.htm.
[7]Allianz Global Corporate & Specialty, Directors and Officers Insurance Insights 2020, Insights @ AGCS (Nov. 2019), https://www.agcs.allianz.com/content/dam/onemarketing/agcs/agcs/reports/agcs-DandO-insurance-trends-2020.pdf.
[8] Swiss Re, Harassment Headlines and “The Weinstein Effect”: The Insurance Implications (2018), https://www.swissre.com/dam/jcr:5077ab71-45ef-4b6b-926c-5d803babf2d8/ARM-18-00615-P1-Harassment_Headlines_Trend_Spotlight-Updated-3-15-web.pdf.
[9] See, e.g., Amid Pandemic Commercial Insurance Buyers Face An Extended Hardening Market Plus New Pressures on Coverage Terms and Conditions, CNN (May 7, 2020), https://edition.cnn.com/business/newsfeeds/globenewswire/7916718.html [hereinafter Extended Hardening Market].
[10] Cornerstone Research, Securities Class Action Filings – 2019 Year Review 1 (Stan. L. Sch. Secs. Class Action Clearinghouse ed. 2020), https://www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2019-Year-in-Review.
[11] Chubb Bermuda, Liability Limit Benchmarks & Large Loss Profile by Industry Sector 2020 27 (2020), https://www.chubb.com/content/dam/chubb-sites/chubb-com/microsites/financial-lines/global/documents/pdf/chubbbermuda_benchmarkbrochure_042220_webwlinks.pdf.
[12] Kevin LaCroix, Signet Jewelers Settles #MeToo-Related Securities Suit for $240 Million, The D&O Diary (Mar. 29, 2020), https://www.dandodiary.com/2020/03/articles/securities-litigation/signet-jewelers-settles-metoo-related-securities-suit-for-240-million/.
[13] See generally, Alice Uribe and Leslie Scism, Companies Are Paying a Lot More to Insure Their Directors and Officers, Wall St. J. (June 21, 2020), https://www.wsj.com/articles/companies-are-paying-a-lot-more-to-insure-their-directors-and-officers-11592731801.
[14] In the Firing Line: Directors and Officers Liability and the COVID-19 Pandemic, Aon, https://aoninsights.com.au/directors-officers-liability-covid-19/ (last visited Oct. 12, 2020).
[15] Joy A. Schwartzman and Philip S. Borba, The Impact of COVID-19 On Directors and Officers Insurance, Milliman (Mar. 27, 2020), https://us.milliman.com/en/insight/The-impact-of-COVID-19-on-Directors-and-Officers-insurance.
[16] Id.
[17] See Aon, supra note 14.
[18] See Id.
[19] See Extended Hardening Market, supra note 9.
[20] Bethan Moorcraft, What Is A Hard Insurance Market?, Ins. Bus. Am. (Oct. 11, 2019), https://www.insurancebusinessmag.com/us/guides/what-is-a-hard-insurance-market-180382.aspx.
[21] Nicole Friedman and Leslie Scism, Insurers Drive Up Prices for U.S. Business, Wall St. J. (Feb. 11, 2020), https://www.wsj.com/articles/insurers-drive-up-prices-for-u-s-businesses-11581417009.
[22] See Marsh & McLennan Companies, supra note 5.
[23] Alice Uribe and Leslie Scism, Companies Are Paying a Lot More to Insure Their Directors and Officers, Wall St. J. (June 21, 2020), https://www.wsj.com/articles/companies-are-paying-a-lot-more-to-insure-their-directors-and-officers-11592731801.
[24] Marsh & McLennan Companies, Global Insurance Market Index – 2020 Q2, https://www.marsh.com/uk/insights/research/global-insurance-market-index-q2-2020.html (last visited Oct. 12, 2020).
[25] Uribe & Scism, supra note 23.
[26] Marsh & McLennan, COVID-19: What Are the Management Liability Implications, (June 8, 2020), https://www.marshcommercial.co.uk/articles/directors-and-officers-series-two/.
[27] Id.
[28] How Coronavirus Could Further Stress an Already-Stressed D&O Insurance Market, Ins. J. (June 12, 2020), https://www.insurancejournal.com/news/national/2020/06/12/571879.htm.
[29] See generally, Marsh & McLennan Companies, Is D&O Insurance Now the Most Important Cover You Can Have?, Marsh Com. (July 16, 2020), https://www.marshcommercial.co.uk/articles/directors-and-officers-series-three/; see also In the Firing Line: Directors and Officers Liability and the COVID-19 Pandemic, Aon https://aoninsights.com.au/directors-officers-liability-covid-19/ (last visited Oct. 12, 2020).
[30] Id.
[31] Uribe & Scism, supra note 23.
[32] Id.
[33] Id.
