Taking Stock of D&O Insurance Market: Capacity, Coverage and Culpability

By | May 10, 2016

The directors and officers (D&O) liability marketplace continues to find softening rates and intense competition especially in excess layers, according to industry executives. The industry is also seeing a continuing trend of broader coverages, cyber risk emerging as a management liability matter, and increased governmental activity that includes holding individuals more accountable for wrongdoing, executives said.

There have been a lot more carriers in the D&O space in the past five to 10 years, according to Louis Lucullo, chief underwriting officer for the Americas Region at American International Group’s Financial Lines, who spoke at the Professional Liability Underwriting Society (PLUS) D&O symposium in February. The majority of newcomers tend to write excess D&O, Lucullo said.

There have also been important developments on the primary side, including some consolidations particularly Ace Ltd.’s acquisition of Chubb, with the combined company adopting the Chubb brand globally.

“But overall, there are still a lot of carriers and a lot of capacity out there for the directors and officers market,” Lucullo said.

Coverage Expansions

Lucullo said there’s been a trend of expansion of coverages, mostly on the investigative side. He said there’s much more litigation. Federal class action security suits tend to be fairly stable year from year, but the overall majority of actions being brought today are being led by a growth in regulatory action.

There also have been more governmental activities from regulatory bodies including the Securities and Exchange Commission pursuing actions through investigations against directors and officers.


“From our perspective, that’s certainly the growing area,” he said. “It has caused the D&O policy to change over the years.”

Lucullo said that a few years ago, AIG introduced the concept of a preclaim inquiry to be covered. “That’s at the moment that an investigator initially contacts an insured to mainly appear before them to answer questions or perhaps to produce some documents. That initiates the coverage much earlier on than historically,” he said. “So there has been a trend to expanding the coverage through more investigative exposure.”

Lucullo also said D&O professionals have been debating how far the coverage should be broadened to address corporate entity exposure. There are investigative cost coverage policies meant just for the entity as a standalone basis. But in the past couple of years, there now are endorsements where investigative costs for the entity could be added to the D&O policy but usually under the requirement that there also be a securities claim that coexists with that regulatory investigation.

Rate Decreases

Simon Hodge, national practice leader for Professional Risk Practice at Wells Fargo Insurance, noted that most of his firm’s clients have seen improved terms and conditions with significant price cuts, with public D&O policies getting renewed with 5 percent to 10 percent rate decreases.

In terms of the market capacity, “several new carriers have entered the D&O space and there is clearly more than sufficient supply to meet client demand,” Hodge said.

He also spoke of broader coverages, with more sublimit capacity availability for investigative costs in cases when directors are asked to investigate a possible wrongdoing. In terms of broader coverage, D&O insurers are becoming increasingly more responsive to providing coverage for entity regulatory investigations.

Also commenting on rates, Kevin LaCroix, executive vice president at RT ProExec, a division of R-T Specialty LLC, noted that while the primary layers are mostly flat, he sees intense competition in excess layers, especially for higher excess and Side A layers.

The result is rate decreases in the mid-single-digit percentage points and up to 10 percent for overall D&O programs.

LaCroix also said he sees a market trend of coverage expansions, such as providing corporate entity coverage.


LaCroix shared his thoughts on recent industry consolidations and advised clients to pay close attention and consult with their brokers. “There’s always been a certain amount of merger and acquisition activity in the insurance industry. In 2015, it really accelerated. It was true both for reinsurers and then for direct insurers,” LaCroix said.

The two most significant deals from the perspective of insurance buyers was XL Group plc’s acquisition of Catlin Group Ltd. and Ace’s purchase of Chubb, which was the biggest industry transaction in 2015. “These are significant players in the D&O insurance industry and the P&C industry as a whole,” LaCroix said. “The combination of these companies means fewer of the larger players and more consolidation or concentration in some larger players.”

He advised that it is important for the clients who are insured with those companies to be in contact with their brokers because there could be process issues this year that haven’t been true in the past.

“It may affect their renewals. It may affect their ability to renew their coverage on the same terms and conditions or the same price,” LaCroix said. “There could be changes in their insurance program just as a result of the changes among the carriers.”

Yates Memo

The industry is also taking notice of a new regulatory development stemming from the “Yates Memo,” which was issued last September from U.S. Department of Justice’s Deputy Attorney General Sally Quillian Yates. In her memorandum, Yates aims to put a greater emphasis on holding individuals more accountable. Companies would be asked to turn in information about culpable individuals to receive cooperation credit for assisting in investigations.

R. Damian Brew, managing director at Marsh USA Inc., said the biggest risk area that the marketplace is seeing today is in the area of government investigations – from the SEC and the Department of Justice.

“One area that’s getting an awful lot of attention is the Yates Memo, issued by the Department of Justice, which really indicated for the first time that the department was going to focus on individual wrongdoing at the expense of corporate wrongdoing,” Brew said.

In fact, Brew noted, the Yates Memo went as far as to say that corporations aren’t going to get cooperation credit unless they provide all relevant facts about potential officers that would be involved.

“There are enormous insurance implications for that, as you can imagine, because now individuals may be seeking separate counsel,” Brew said. “They may be in a position where they’re adverse to their companies. There may be questions about advancement and indemnification. So this is a very important step and it’s one that the industry and corporations and their officers are going to be watching very closely.”

Cyber Liability

Another risk that many directors and officers now face is cyber liability.

Tony Galban, senior product manager of D&O at Chubb, said cyber has made its way into the boardroom as a management liability issue, which is not that unusual compared to other exposures in the past, like asbestos, pollution or environmental concerns.

“Cyber is just a new exposure that has to be addressed at the board level. It’s no longer reasonable for the board to ignore the risk of cyber,” Galban said.

“Everything we’re hearing suggests that it’s being attended to on a regular basis in boardrooms across the country as a line item agenda that the board has to deal with, whether by loss control, whether by insurance purchasing, but certainly not by ignoring it,” he said. “You can’t get away with that anymore.”

Galban said that there have been D&O claims associated with cyber. Typically, the allegations are that the management didn’t manage the issue sufficiently.

“More directly, you’ll see cyber policies responding to direct cyber loss. But to say it’s strictly a cyber product issue would be a misnomer,” Galban said. “It affects other policies like the D&O, where we’ve had some claims, typically shareholder actions.”

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