Directors & Officers liability has been a popular topic as of late for me. Every day there are new headlines and the one that could have the biggest impact would be the recent story about shareholders losing their right to sue corporations. The headline came from The Intercept and was titled, “Will Shareholders Lose the Right to Sue Over Corporate Fraud?”
There is a lot that can be discussed here, the first thing to mention is that Fraud is often excluded if it is a deliberate or criminal act and there is a final judgement against such conduct. A company cannot deliberately act in a fraudulent way and expect insurance to pay, this would create a moral hazard which insurance companies are not in the business of insuring. However, this article uses the word “fraud” in a broad matter and some of these so called frauds could in fact be covered by an insurance policy.
Assuming that these “frauds” are covered by insurance let’s take a look at how this could impact D&O insurance. When there is a D&O claim, a large chunk of the costs are for legal expenses and these can become rather large even when a case is without merit. Many carriers, at least for public companies, have pushed for higher retentions (similar to a deductible but an insured incurs the cost upfront instead of at the backend) because the number of small claims that were piercing the retention were increasing in frequency.
If you are a public company biotech it is not uncommon for insurers to not offer any retention below $1M, whereas a couple of years ago a $500k deductible was definitely available. If shareholders can no longer sue for “fraud” this could cut legal expenses down tremendously. The quicker a case makes its way through the system the lower the legal costs. The bad news is that insurers are quick to increase retentions but not lower them. Every now and then I see a retention lowered but it is because the risk profile has changed dramatically for the company.
How about price? Again, I think carriers will resist price decreases because when we look at pricing historically it has been trending down for year but claim costs have increased tremendously. This softening of pricing is not as true for the life science industry which has been ticking up in pricing, but rates are still low. This was accelerated because AIG in effect stopped writing life science IPOs and that drove the pricing way up for that segment of the market.
At the end of the day, this would be good for companies but insurers would work hard to now allow this change to have any meaningful impact on D&O pricing or terms. Your broker should make the argument that at the very least it would warrant either a lowering of the retention or a premium reduction if not both. Your broker should remember that the underwriter justified an increase in retention and/or premium because the policy was being used for small frequent claims instead of a large, catastrophic claims as it was intended. If the frequency issue is eliminated or greatly decreased it is the job of your broker to advocate on your behalf why that warrants a lowering of premium or retention.