For corporate directors and officers, the cost of doing business in 2020 is unprecedented. COVID-19 is the largest—but not the only—factor exposing boards to increased litigation from all angles, throwing a major wrench into insurance renewals. Tesla CEO Elon Musk recently made headlines when he opted to forego D&O insurance in favour of “equivalent” personal coverage, but they’re not the only company considering unconventional fixes.
We turned to Megan Potts, an expert in D&O policy with 12 years of experience working with PRL clients across every industry, for advice on how to navigate this uniquely challenging market.
Firstly, what is D&O insurance?
Directors and Officers (D&O) insurance is a liability insurance that covers costs in the event of legal action against your company’s high-level leadership (the board of directors and officers). It typically has three main components: Side-A, which protects personal assets of individual directors and officers themselves; Side-B, which protects the corporation’s assets when they have to reimburse directors or officers, and Side-C, which protects organizations themselves (in particular, publicly-traded companies in the event of a securities lawsuit).
What are the biggest pros (and cons) of D&O?
The main advantage is asset protection for individual directors and officers. It attracts strong, highly qualified people to your leadership team, giving them peace of mind to act in the best interest of your organization without worrying about personal assets being on the line. It also shields your organization’s balance sheet, as defense costs alone can get extreme in a securities lawsuit.
That said, D&O doesn’t cover everything: if a specific liability is already covered by another policy – such as trips, slips and falls, professional errors and omissions (E&O) or pollution – those wouldn’t be covered here. It also excludes intentional, wrongful, criminal acts, such as fraud.
How has the D&O market changed in 2020?
It’s a very hard market right now, the worst I’ve seen in 12 years. COVID-19 aside, capacity and limits actually started decreasing early last year. Many would say that D&O coverage has been underpriced for a long time, so it was natural that premiums would eventually rise, but several insurers also decided to shift strategies or leave this market altogether, raising demand (and pricing) for those left standing.
Add a global pandemic on top of all this, and you have a perfect storm. The virus – and its economic impact – opened the door for class-actions, insolvency and a slew of liabilities. Companies less hurt by the pandemic, like some in mining and energy, are seeing about a 10 to 15 per cent increase in premiums, but those harder hit – such as retail and travel, or those with a U.S. stock listing – have easily seen premiums double, if their providers are willing to renew at all.
Can business owners do anything to optimize their premiums in the current environment?
Absolutely. If your renewal is coming up, a proactive approach is key. First, set up a pre-renewal meeting with your broker to get a better sense of today’s marketplace. Next, talk with your insurers directly – brokers are excellent mediators, but no one tells a client’s story better than the client. In my experience, uncertainty results in additional premiums, so a direct conversation allows underwriters to ask questions and address concerns right away. The more transparent you can be, the better the result.
Present your business like a pitch to investors, and make a clear case why you’re still worth backing. Outline steps you’re taking to address hot-button issues, whether it’s COVID-19, cyber security, workplace diversity or the #metoo movement. Event-driven litigation is rising due to all of these, so if you showcase a strong action plan for mitigation (e.g. a detailed workplace cleaning and safety protocol, programs for fostering staff diversity, a whistleblower hotline and so forth), insurers will see you as a more favourable risk than your peers.
If traditional D&O coverage isn’t an option, what alternatives do I have?
Consider creative ways of restructuring your coverage. First, think about increasing retentions (or deductibles); the more risk you’re willing to take on, the lower your premium.
Quota shares are also worth exploring. Usually, D&O insurance is built up like a tower with a series of blocks – Company A covers the first block, Company B covers the second one, and so on – with less risk the higher up it goes. Insurers are reluctant to take on those initial, high-exposure blocks, but in a quota share, multiple companies split up costs proportionally and reduce individual risk.
If protecting your board is the biggest concern, Side-A only coverage is a back-to-basics approach that really reflects what D&O insurance used to look like. It works best for large corporations with the funds for high retention and good coverage in other areas.
Next, consider adding exclusions (for example, a tailings exclusion in the mining industry, or bankruptcy exclusions in an industry rocked by the pandemic). It’s not ideal, but narrowing coverage is a tactic frequently used in hard markets, making you a more favourable risk in the eyes of the insurer.
Finally, look at alternative risk transfer strategies, such as captives. These haven’t specifically been used for this kind of situation yet, but it is something that insureds are asking their brokers to look into.
Any final advice?
It’s no secret that this is an incredibly hard market, but that’s no reason to lose hope. Think outside the box and work with your broker and insurers to develop creative solutions. Despite the circumstances, it’s all part of a cycle. If you can ride this out, the power will eventually be back in your hands.
Megan, along with her team of D&O insurance experts, have the experience you need to create a comprehensive insurance program. For more information, contact:
Megan Potts, BBA, CIP, CRM
Partner | Management Liability Practice Leader, 647.259.3564, mpotts@purvesredmond.com
