D&O divisions

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It did not take long for the first coronavirus securities lawsuit to be filed, just a few weeks after initial Covid-19 jitters struck global markets in mid-February.  

On 12 March plaintiff Eric Douglas submitted a class action against cruise operator Norwegian Line, alleging that he and other investors purchased shares at an “artificially inflated” price as the company claimed it had taken protective measures for its guests and crew.  

The speed with which this lawsuit was brought demonstrates just how febrile and plaintiff-friendly the legal environment in the US has become – described as a “tax across society” by Travelers CEO Alan Schnitzer, late last year.  

Epithets like “social inflation” and “outsized jury awards” are used interchangeably across the market to bemoan the changed nature of the legal environment and explain almost unilateral double-digit rate rises across most segments of the directors’ and officers’ (D&O) market over recent quarters. 

However, the reality of loss development and the impact of surging claims on carriers’ behaviour towards their peers in this segment of the liability market has escaped scrutiny.  

Three-to-five-year tail 

Since the third quarter of 2019, rates across virtually all ABC policies and side-A only cover in the US have surged as large corporate markets including AIG have cut limits and curtailed their appetite for these classes of business.  

The increased volume of class action and derivative lawsuits being filed has widely been cited as the cause of this surge. However, multiple sources canvassed by Insider Quarterly suggest the reality is more complex – largely because the class of business has a three-to-five-year tail.  

Figures collected by Cornerstone Research and Stanford Law School indicate that federal securities class action lawsuits in 2019 inched up 2 percent year on year to 428 – their highest level since 2011, which has fuelled uncertainty over the direction in which loss costs are moving.  

Uncertainty over claims development has fuelled significant rate rises in sub-segments of the public D&O market, with sources writing niche business including pharma and US West Coast tech D&O accounts reporting rate rises in excess of 60 percent on some clean accounts renewing in the first quarter of 2020. 

“In our segment of business we have seen rate rises way in excess of the low to mid-single digits being talked about publicly,” one source tells Insider Quarterly.  

Speaking earlier this year at an Advisen D&O conference in New York, Goldman Sachs analyst Yaron Kinar – himself previously a D&O underwriter – warned that carriers have not yet felt the impact of surging litigation expenses.  

“We’ve seen a massive spike in securities class actions, a big spike in defense costs...You’re not even seeing that in the numbers yet – it takes three to five years for this book to really develop,” the analyst said.  

Furthermore, the impact of changes in legislation permitting new cases relating to historic sexual abuse and the rise in shareholder derivative actions has not yet hit the market. 

Lead-follow relationship 

As the public D&O market strains under the weight of rising settlement costs, underwriters have sought ways to spread the cost burden. In some cases this has led to a significant shift in the relationship between lead insurers and following markets on liability programmes.  

Multiple sources speaking to this publication described how, in recent months, it has become common practice for carriers underwriting excess layers of a liability insurance tower to contribute to claims that have hit only the primary and perhaps also the first or second excess layer.  

Following markets are actually seeking to pre-empt the bad publicity accompanies disputes over high-profile claims, especially those involving financial institutions.  

Major claims such as the action brought against former Deutsche Bank CEO Rolf Breuer over a TV interview given in 2002 can take years to settle, involving millions of dollars’ worth of legal fees. Insurers on risk in that particular case, including Zurich, AGCS and Chubb, finally paid out EUR100.3mn, or $112.4mn, in 2016. 

“In many cases it is easier to push for a quick settlement and make sure the client gets their money,” says a legal source specialising in public D&O claims resolution. “One of the ways of doing this – and generating a huge amount of goodwill – is to contribute to the payment made by carriers lower down the policy.”  

The number of insurers seeking this form of claims resolution has increased in frequency since 2018. 

Other notable D&O settlements that have pushed carriers to settle with insureds earlier and faster are understood to include a EUR19.5mn ($21.8mn) claim arising from shareholder litigation against German trucking conglomerate MAN SE and a $7.6mn loss sustained by European defence contractor Rheinmetall. Both claims were settled in 2019. 

Standing up to litigation 

The increasingly unforgiving judicial environment in the US has spurred greater collegiality between insurers seeking to challenge legal decisions that set similar, negative precedents for the industry.  

Chubb has reiterated a call, first issued in a white paper published in 2019, for insurers to stand up to the rising tide of securities class action lawsuits and to challenge – in the courts and in the public domain – litigation decisions that seem incorrect.  

The carrier’s head of public D&O in North America Jarrod Schelsinger told a recent industry conference that insurers must present a more unified front and stand up to litigation that sets a negative legal precedent for the industry.  “It’s…really important that, as an industry when we see a litigation decision that doesn’t smell right, we do something about it,” he told attendees at an Advisen D&O conference in February. 

While a surge in corporate liability claims has spurred markets to adopt a more unified front towards precedents set in the courtroom, it has in some areas provoked greater division.  

One area in which this has become apparent is in mediation. As cost pressures intensify, some following markets in the US are questioning whether claims mediators – independent lawyers that are generally engaged by a lead insurer – are able to represent their interests.  

The motives of parties involved in the robust negotiation process that typifies corporate liability claims adjustment are not always distinct and easy to discern, which in some circumstances may be deleterious to the interests of following markets.  

After all, a contractor who receives repeat business from a major lead market may not always be incentivised to stop claims developing as swiftly as possible – after all, the client is unlikely to complain if the loss hurts their competition.  

In recent months, these relationships have come under greater scrutiny, and an awareness has developed among underwriters.  

“This is something we need to think about, maybe with intervention from an industry association,” one source says.  

Other sources say they are aware of the issue and recount instances in which major claims have unexpectedly risen late in negotiations.  

“This definitely needs looking at. If I’m a mediator and my fees are contingent on doing a satisfactory job then it may not always be in my interest to stop a loss from creeping up the [liability insurance] tower,” another underwriting source says. 

Rates in the D&O market continue to surge by double digits and, as the market prices for uncertainty and the slew of litigation likely to follow Covid-19 pandemic, this will likely continue.  

But rather than just making cover more expensive for insureds, the prevailing legal environment has continued to increase both collaboration – and potentially also the number of disputes – in the US D&O market. 

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