5 D&O insurance priorities to keep in mind during 2021

The global commercial insurance markets felt the pressure this year, particularly among U.S. D&O buyers, as the sector saw pricing jump more than 50% during the fourth quarter, according to Marsh LLC, which reported in excess of 90% of its D&O policyholders renewed with rate increases.

Corporations are not just seeing higher premiums, but also narrowing coverage, as underwriters are no longer looking to provide some coverage enhancements that were available in the past.

Helping insurers prepare to meet the needs of their D&O clients in 2021, Marsh highlighted the following as five upcoming trends.

1. New year, old challenges

Capacity contraction and competition are moving carriers to take a more aggressive negation stance on price and coverage. This is especially true for hard-to-place industries such as life sciences and tech firms and companies preparing to go public, according to Marsh.

Limited capacity isn’t an issue exclusive to U.S. markets, and while London markets have provided supplemental domestic capacity for U.S. corporations, underwriting interests in Britain have waned. This is leaving companies that have typically relied on London insurers to hope other markets can elevate capacity limitations.

While new players in the market are expected to increase supply, hampering price increases, Marsh reported it will take some time before their impact is truly felt. This will help difficulties felt today persist into 2021.

2. Derivative lawsuits driving up Side-A coverage

Growing costs from securities litigation are pushing up D&O premiums, with an estimated 350 cases filed this year, Marsh reported. Particularly impactful are increasing cases of derivative actions, or when a company files a suit against an individual director or officer after alleging a violation of duty. Event-driven lawsuits that stem from an inadequate response to sexual harassment allegations or cyberattacks, for example, make up many recently filed derivative suits.

Derivative suits are also becoming more expensive, as plaintiffs are no longer appeased by settlements covering attorneys’ fees and changes in corporate policies, according to Marsh. They are now looking for compensation for their damages as well.

Since these types of lawsuits are not indemnifiable in most states, protection against them is only found in Side-A D&O coverage, which provides personal asset protection for directors and officers. While it has been readily available in the past, Side-A coverage prices are now increasing because of the frequency and growing cost of derivative suits.

3. ESG issues need attention

Shareholder activists are increasingly focusing on environmental, social and governance (ESG) issues, with particular emphasis on diversity. This is causing public companies to worry about how their D&O policies will respond, as coverage of activism has typically been limited and varied by carriers. However, policyholders have been pushing for more clarity in recent years.

Insurers are now considering developing specific activist-defense coverage grants, according to Marsh, which added insurers typically decide if they are going to provide coverage on a case-by-case basis.

4. Diversity takes focus

Some public companies have already faced security suits demanding their board become more diverse, alleging they’ve breached their fiduciary duties by making false assertions about their commitments to diversify.

In 2021, shareholders, states and exchanges will press the issue even more. Insurers should take note, and underwriters should be asking detailed questions about board compositions during renewals. Given the legal environment, companies that do not follow up on diversity commitments could see their standing with underwriters weakened, according to Marsh.

5. More corporate restructuring to come

Despite starting slow, 2020 saw many deals close, and the new year is expected to see more of the same.

In the coming year, some 200 special purpose acquisition companies (SPACs) will attempt to complete mergers with private companies, according to Marsh. The volume of SPAC D&O policies written will put pressure on capacity, buyers’ retentions and premiums. In fact, this has already started as SPAC D&O prices have been rapidly increasing.

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