For years, directors and officers, and entity coverage for privately held firms was one of the best deals going, with broad coverage, cheap pricing and low retentions.
Over the past several years, market capacity suppressed management liability pricing and retentions below actuarially sound levels. Since the financial meltdown, carriers have responded by taking repeated pricing increases, requiring higher retentions and making other less obvious, but more telling, changes.
The question is whether this is due to a normal market cycle, or whether there’s something insidious at work.
Changes of concern include many markets refusing to write a risk with the least little bit of peach fuzz on it, former market leaders pulling out of entire industries or geographical territories, and underwriters refusing to modify exclusions that neuter coverage for insureds in various industries or situations.
The most reactive markets are generally those that have commoditized the management liability lines, or have used management liability as a training ground. Underwriters that do not have a background in publicly traded directors and officers liability exposures and coverages often do not understand what it means for the insured persons to be properly covered. Certain exclusions were added to the D&O form when the entity became an insured and the management liability form was created. In many forms, these exclusions bleed over to the insured persons’ coverage. There are few offending markets now willing to modify wording to properly narrow these exclusions.
An abundance of restrictive exclusions is a classic sign of a hard market, but in this case it is also a sign of the lack of understanding of the purpose of a D&O policy – protecting the insured persons from liability that could result in the loss of their personal assets.
This penchant for more restrictive exclusions has also caused many carriers to choke off almost all coverage for the entity. Some claims are properly excluded from coverage for the entity in a management liability policy: breach of contract, pollution and professional liability, for example. Other policies exist for these perils, or they are still considered uninsurable business risks. But the exclusionary wording is overbroad even as it applies to the entity, and many underwriters are no longer willing or able to modify the exclusions as needed to provide functional coverage.
Fixing the Problem
There are three major acceptable approaches to providing coverage under management liability policies:
- Coverage for the insured persons that is no narrower than that which they would enjoy were their organization publicly traded;
- Coverage only for shareholder or creditor claims; and
- Coverage for the operational exposures of the entity.
These can be mixed, matched and deployed in any combination. Educated insureds may desire any level or combination of coverages provided by these approaches. Carriers must be clear on what approaches they are embracing, and communicate this to their agency plant. Policy wording, underwriting and pricing should reflect this approach.
Additionally, agents and brokers need to understand that management liability is not a commodity but a highly complex and nuanced line of coverage. Getting the most out of a policy requires clear and concise communication between the broker and underwriters, and a thorough understanding of the insured’s exposures and the coverages that should be available to address them.