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April 06, 2021

D&O Insurance Market Update

If your board is sued for failure to provide appropriate corporate leadership on a topic such as discrimination, harassment, data breach or mergers and acquisitions, which insurance policy will pay for your board’s defense?

In many cases, it’s your Directors & Officers (D&O) policy. In today’s litigious environment, good D&O coverage is more important than ever.

Unfortunately, securing D&O coverage is getting more difficult and more expensive. Rates are up, capacity is down, and risks are high. Here’s a look at the current D&O market.

How High Are Rates Climbing?

MarketScout reported that D&O rates were up 11.5% in the fourth quarter of 2020. This was the biggest rate increase seen in the quarter.

Higher premiums are only one consequence of the current D&O market. Insurance carriers are also using tighter policy terms with fewer options and stricter terms. Some insurance carriers are also applying COVID-19 exclusions, as well as insolvency exclusions.

Limits are also lower. This comes at a time when jury awards are growing, and companies may want to seek higher limits.

Why Are Rates Climbing?

Fitch Ratings says that rising defense costs and multimillion-dollar jury settlements have contributed to three years of underwriting losses.

The current market is the result of multiple factors, including the following:

  • Securities lawsuits are driving up costs. According to Cornerstone Research’s 2020 Year in Review, 2020 was the first year since 2016 with fewer than 400 securities class action filings. However, capitalization losses remained elevated due to several mega filings.
  • Harassment and discrimination claims are in the spotlight. Soon after the #MeToo movement put the spotlight on sexual misconduct in the workplace, the EEOC reported an increase in filings involving sexual harassment claims.
  • Cyberattacks are surging. Infosecurity Magazine reports a 150% increase in ransomware in 2020, based on a report from Group-IB. The average ransom demand was $170,000, and some types of malware had ransoms as high as $1 to $2 million. Other types of cyber incidents, including data breaches and business email compromise schemes, have continued to be an issue as well, and the sudden switch to remote work made cybersecurity especially challenging.
  • The pandemic is increasing lawsuits and uncertainty. Property Casualty 360 has reported that allegedly inadequate health and safety precautions have led to a surge in COVID-related D&O claims. According to Insurance Business, the Q2-2020 Commercial Property & Casualty Insurance Market Outlook Report from USI showed that the pandemic was accelerating premium increases, with both public and private companies being impacted.

What Can Be Done?

The current D&O market is challenging for all businesses.

According to Property Casualty 360, low-risk renewals may see premium increases of 20% to 40% along with more restrictive terms and fewer options, while high-risk renewals may be left without any renewal options. The outlook is also bad for first-time buyers, who may face higher premiums and have a harder time securing coverage.

Because this is a challenging market, brokers and insureds must be ready.

  • Accept that rate hikes are coming. If a policy is up for renewal, a premium increase is likely. Also, prepare for stricter terms.
  • Be proactive about risk management. Show the carrier what steps are being taken to reduce the chance of claims.
  • Shop around. Securing coverage may take longer in this difficult market.

Contact your Heffernan Insurance Brokers agent to start a conversation about your business insurance and D&O coverage well ahead of your renewal data. As an independent agency, we have many carrier relationships and will go the extra mile to help you navigate this challenging market.

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