Spring 2021 D&O (Management Liability) update Market Developments

As I am sure you are all painfully aware the D&O insurance market has been in a state of uncertain volatility during the last 24 months. The causes of this upheaval include but are not limited to an increase in claims, lawyer fee inflation, breadth of policy coverage and chronic risk under-pricing by underwriters for many years.

However, there are signs that the market may be stabilising. In particular we would highlight certain insurers who have a relatively small historic under-priced UK based risks. These would include Beazley, Berkshire Hathaway, Aviva and Covex. In an additional exciting development, the formation of a new D&O focussed MGA, ‘Rising Edge’ has been announced which is the brainchild of some very experienced market practitioners that we know very well.

Several insurers have also recently commented that they see rate on premiums flattening in the next twelve months – we will of course continue to monitor this.

We do appreciate that understanding the cause of the disruption does not lessen the financial discomfort for clients, but it can inform certain measures that can be taken to minimise the impact that the hard market has.

Pragmatic Hard Market Steps

The following simple steps will assist in any renewal negotiation:

• Prepare for renewal at least twelve weeks in advance of renewal date
• Always agree and check the renewal strategy that will be employed by your broker in order to differentiate your risk
• Seek a virtual meeting with your insurers to further stand out from the crowd
• Be willing to articulate your plans beyond the easing of pandemic restrictions and share hard numbers/data if required
• Fully describe your systems and controls around any redundancies/restructures that may have been or may in the future be necessary
• Strive to understand how all your sections of your D&O policy work and interplay – this will assist in underwriter negotiations
• Demonstrate how corporate governance is in your business – we believe that this will become an area of increased focus in the future.

Corporate Governance 2021

As we know, the UK public company sector has had to live with corporate governance scrutiny since late 1992 as the Cadbury Code was introduced in the wake of the collapse of the Maxwell Communications empire. Whilst laudable efforts have been made to establish appropriate standards of corporate life in the ensuing thirty years or so there have still been some very significant corporate collapses including;

• Carillion
• Thomas Cook
• Patisserie Valerie
• BHS

There are growing calls for the audit function to be overhauled along with the introduction of more draconian penalties for the directors of failed enterprises. Whilst the focus is currently firmly on the quoted company sector, the higher standards expected from the boards of public companies are also now being sought in the private sector too.

"It was appropriate’’ that large private companies, with a large number of stakeholders ‘’are increasingly brought within the scope of audit and governance reforms’’  - Dr Roger Barker, Head of policy and Corporate Governance at the IOD.

Of course, this new level of scrutiny will put pressure on those insurers offering D&O cover primarily in the private sector.

Claims

As previously referenced, all D&O Insurers are citing an increase in claims activity as the primary driver for the recent market broken play. It is however, interesting to note that given the various forms of business relief available occasioned by the COVID – 19 pandemic, it is widely assumed that there are many ‘zombie’ companies currently operating in the UK. It is further assumed that these entities will fail as the relevant ‘helping hands’ are withdrawn. This then points to a potential increase in claims as litigation ensuing from insolvencies increases.

The sectors most closely scrutinised by underwriters are retail, leisure, and care homes.

‘’when government support comes to an end, the industry will have to face a reality that is not pretty. It has been on life support for the past year and the reality will be very difficult when all that stops.’’ - Franck Arnold MD the Savoy

Furthermore, we should note some of the metrics around claims being cited by AIG. The key areas of loss now include:

Modern Slavery

Cyber/privacy

Gender pay

AIG further note that the average cost of defending a director against a Serious Fraud Office(SFO) prosecution is GBP 4 million with a maximum paid of GBP 16.5 million for one individual. Given these numbers as ever, it is vital that directors review their limits of liability regularly in conjunction with their brokers.

A Warning!

It has been reported by one insurer that they are increasingly having to review claims notifications sent to them following suspected failures to adequately disclose claims or circumstances that could give rise to a claim at renewal/inception.

As much D&O underwriting is now done online and with less broker input apparently required some of the core disciplines have fallen away from the renewal process. I therefore feel it is timely to remind ourselves that at each renewal a prudent board of directors will implement a system whereby they annually make relevant enquiry within their business as to the existence of any potential claims or circumstances that could give rise to a claim against them.

It is vital that any issues that emerge as a result of this process are reported to underwriters as soon as possible (per policy requirements). The consequences of a failure to notify such matters appropriately fall into a broad spectrum of remedies ranging from retrospective imposition of draconian terms and conditions to rescission of cover and repudiation of the claim. Of course, the exact nature of the remedy will be governed by the relevant policy language - PIB can advise here.

Coverage Caveats

We have recently been made aware of insurers seeking to impose the following clauses on D&O renewals;

• Deletion of discovery periods
• Insolvency exclusions
• Covid exclusions
• Redundancy exclusions

To be very clear these are not standard and should never be accepted if at all possible. Furthermore, we have seen two examples of insurers seeking to delete discovery from an extension period along with deleting the ability to notify claims circumstances – this is NEVER to be accepted by a client unless contingencies are in place to laundry list any existing issues. Again, happy to discuss.

Contact us

If you have any issues arising out the contents of this newsletter, please do not hesitate to contact:

David Walters - Head of Financial Lines

Garry Hill - Professional Risks Director

Alycia Thomson - Client Services Manager