Broad management liability policies are acutely exposed because
of the prolific media attention that has made the sexual harassment issue a focus for companies of all sizes. The Weinstein Effect
demonstrates a particularly difficult dilemma for D&O carriers:
How to price for unpredictable volatile headline events that inevitably culminate in D&O claims with serial follow-ons.
What lurks below for insurance carriers?
Beyond news and statistics, there are other surprises hidden in
the deep. Even matters that do not hit headlines can pervade the
D&O market when attacked with high concentration in a specific
area. An example of this is the popularity of specialized scrutiny
of ERISA funding, investment and management.
Attorney Jerome Lechter has made a name for himself in this
area and many carriers have seen a proliferation of doppelganger
cases. The D&O industry is expected to see more of these claims
that have not fully washed through the market.
At a policy level, the view of D&O coverage as a commodity is becoming more problematic. D&O insureds are typically
sophisticated buyers, particularly public D&O buyers, and these
insureds are more frequently viewing their D&O coverage as a
cash vault. There is a growing tendency to view the policy as a
tool to pay litigation to go away; this is a departure from past
years where insurance was perceived as a vehicle to advance and
support vigorous liability and damages defenses. D&O insureds
are increasingly prioritizing early settlements to avoid publicity
and reputational damage.
A recent Deloitte report has concluded that reputational damage may be a key threat for large companies, and one that directors and officers will feel increasing pressure to guard against.
Another less obvious trend is the increasing complexity of ‘hat
wearing.’ D&O insureds (often within broader management liability policies), may hold officerships for multiple entities. Piecing apart titles, entities and coverage allocation is an area of more
frequent scrutiny and increased cost.
On the topic of costs, many carriers agree that the defense
burn rate seems to be increasing with, for example, a $10M primary limit no longer representing a strong buffer from defense
expense for carriers participating above the primary.
Shareholder activism is also a newly popular discussion
A possible break from “no relief”
amongst D&O carriers. The World Economic Forum recently
addressed this topic, stating, “an impressively influential share-
holder underdog has appeared: the shareholder activist.” Share-
holder activism is expected to gain momentum and may result in
claims against directors and officers based on clashes between at-
tention to short-term and long-term duties and responsibilities.
While these forces are in play, other developments may act as a
ballast to a difficult market. In its first year, the Trump administration has invested headlong energy into judicial appointments and
confirmations. These confirmations are expected to have a long-term effect of stacking a judicially conservative deck – possibly
advantageous to D&O insurers.
While this reshaping will be felt over a much longer period, there
is vigorous discussion concerning whether the new Chairman of the
SEC, Jay Clayton, will push for and support reduced regulation.
Perhaps regulatory reductions are already underway. A
Georgetown University study confirms that the SEC filed 612 enforcement cases in 2017, which is the fewest cases in the last four
years. According to the study, the reduction may confirm the ex-
pectation that President Trump intends to allow the SEC to steer
more favorably toward corporate, commercial and/or insurer interests. The concomitant drop in fines and penalties collected by
the SEC may also signal lighter treatment. Consistent with this
change of tide, Clayton has been widely quoted as stating that
enforcement actions on large corporations hurt shareholders.
With an increasingly competitive D&O marketplace, carriers are smart to keep a close eye on the evolution of cyber D&O
standards, exposures presented by new technology and headline
stories, as well as regulatory and judicial trends.
And, as the plaintiffs’ bar has capacity and motivation to pursue D&O cases against smaller companies, this will contribute
to intense pressure on the D&O market to appropriately predict
and competitively price risks, especially as D&O cases continue
to command premium defense rates.
The irons are hot for the plaintiffs’ bar to accelerate the frequency of D&O litigation. It remains to be seen if administrative
actions will act as a counter wind. D&O carriers must stay vigilant from the watchtower.
Jane Mandigo ( Jane_Mandigo@swissre.com) is a senior vice
president and senior claims expert with Swiss Reinsurance,
specializing in professional lines matters.
BRAND NEW TECHNOLOGY AND HEADLINE EVENTS DEMONSTRATE
THAT THESE ARE THE FLUXES THAT WILL DRIVE NEW D&O CLAIMS