D&O Insurance: Quality Coverage Available if You Know Where to Look

Investors in private equity firms typically pay attention to insurance markets, so when one firm recently approached the renewal date on its Fund Management Liability Insurance policy — including Directors and Officers Liability (D&O) coverage — members anticipated a rate hike of 30%-40%.

Such is the state of the market for Property and Casualty (P&C) Insurance, and for D&O in particular. With rates, availability, coverage capacity and underwriter selectivity all trending against Directors and Officers Insurance buyers, pessimism is understandable.

This explains the private equity firm’s reaction when the actual increase on its D&O coverage was less than half of what management anticipated, and with no change in coverage — no reduced limits, no new exclusions. Accepting a double-digit increase in rates wasn’t exactly occasion for high-fives, but nor was there any drama. Under the circumstances, the firm was more than pleased.

If you’ve read previous articles in Alera Group’s follow-up series to our Property & Casualty 2021 Market Outlook whitepaper, you may sense a theme here: When it comes to insurance, it pays (or at least saves) to work with a knowledgeable, experienced and diligent agent or broker.

The outcome of the private equity firm’s renewal process was satisfactory because its broker had done the work necessary to submit a detailed application and market the coverage to multiple carriers. Hard market or no, anyone can find off-the-shelf coverage for Directors and Officers Liability. Getting the right coverage at the right price is where knowledge, experience and tenacity make the difference.

The Outlook Entering 2021 

To better understand consumer pessimism regarding D&O coverage, take a look at the outlook described in the Alera Group Market Outlook, released in December 2020:

• Many anticipate the D&O market, thought to be in its hardest market since 1985, will remain “hard” throughout 2021.
• Losses are the highest they’ve been in a decade. The threat of increasing numbers of lawsuits resulting from COVID-19 is exacerbating an already difficult market for buyers and underwriters.
• Rates, while projected to average more than 13.2%, could increase as much as 70% for some classes.
• Limits are being reduced on renewals, with lower limits offered for new business; some carriers have stopped offering coverage to new clients.
• Availability and capacity will be restricted to fewer classes of business. The hardest hit sectors will likely be airlines, automotive, cannabis, energy, entertainment, health care, higher education, hospitality and retail mall owners. Private company exposures will be under pressure due to difficult-to-evaluate risks in connection with employment practices, bankruptcy, cyber and consumer protection.

In short, the outlook was bad. And for Directors and Officers Liability coverage, it hasn’t gotten better.

To obtain the entire Property & Casualty 2021 Market Outlook whitepaper, click the link below.

GET THE WHITEPAPER 

Why Is D&O Coverage Necessary? 

Whether you’re a director or officer for a private equity fund, a private company or a nonprofit organization, you need D&O coverage to protect you from a claim against you due to your service in that role. As outlined by the Insurance Information Institute, “The types of claims that may target company leadership individually as well as the company itself typically include:

• Shareholder suits over company or stock performance
• Creditor or investor suits over mismanagement or dereliction of fiduciary duties
• Misrepresentation in a prospectus
• Decisions exceeding the authority granted to a company officer
• Failure to comply with regulations or laws
• Employment practices and HR issues
• Pollution and other regulatory claims
• Cyber liability.”

D&O policies typically exclude other types of claims, including crime, but they do cover legal fees if a director or officer is exonerated of wrongdoing.

A rise in Directors and Officers Liability lawsuits was primarily responsible for a hardening of the D&O Insurance market as early as 2018. COVID-19 and the waves of layoffs and bankruptcies it has created have made matters worse.

As far back as August, PropertyCasualty360 was reporting on COVID-related D&O suits based on claims including inadequate health and safety precautions, wage and hour violations, wrongful termination and more. “As the spread of COVID-19 continues to impact businesses’ bottom lines,” the piece’s authors concluded, “directors and officers will continue to have broad liability exposure to shareholders, stakeholders, employees and government.”

What You Can Do 

You can mitigate the effects of the P&C hard market and secure effective Directors and Officers Liability coverage, but it takes work – by you and your agent or broker. Here are some basic steps to take:

1. Work with a specialist. An experienced broker knows which carriers have the capacity to write D&O Insurance and which aren’t currently interested in providing that line of coverage.
2. Market your coverage annually; don’t simply renew. Provide your broker with all the information needed to complete a thorough application, including financial records. If your financials are in good shape, you’ll get coverage at a competitive price. If they’re not, obtaining coverage will be harder … and more expensive.
3. Start early. A good broker will work the market on your behalf, but that takes time.
4. Register for Alera Group’s cyber security webinar. Cyber Insurance is a must in today’s online world, but it may not cover all of your exposures. As Risk Management magazine reports, “D&O Insurance is absolutely essential when the cyber stakes rise for officer and director liability exposures.” Join Alera Group and World Synergy on April 28 to see where cyber and D&O exposures merge and diverge.

REGISTER FOR THE WEBINAR 

About the Author

Teddy Felker
Managing Director, Private Equity Practice
GCG Financial, an Alera Group Company

Teddy Felker is a fourth-generation insurance broker based in the Chicago office of GCG Financial, an Alera Group Company. He spent four years at Marsh (global brokerage firm) in New York and San Francisco before joining GCG in 2012. Teddy works with private equity funds, independent sponsors, family offices, specialty lenders, and investment banks, brokering these lines of coverage:

• Rep and Warranty Insurance
• Directors and Officers Insurance (D&O)
• Property and Casualty Insurance, including Workers’ Compensation, General Liability, Auto, Property, Umbrella
• Professional Liability/Errors and Omissions (E&O)
• Cyber Insurance
• Pollution/Environmental Insurance.

Contact information: 

• teddy.felker@gcgfinancial.com
• (847) 457-3105