Last fall, a Seattle accident involving an amphibious “duck boat” tour vehicle killed four people and injured 64.
Shortly afterward, a report surfaced that the company that owned the vehicle—Ride the Ducks of Seattle, owned by privately held Herschend Family Entertainment—had prior knowledge of a defective axle that needed repair. At press time, Ride the Ducks faces multiple lawsuits from survivors citing negligence among other grievances.
As usual, the tragedy and subsequent fallout spotlights a number of lessons for insurance agents and their commercial clients. But one that might not come to mind immediately is the importance of a good D&O policy.
“The story behind the story is it’s a management responsibility to make sure operations are effective and that you use proper protection and security,” says Dick Clarke, senior vice president, J. Smith Lanier & Co.
Private companies never used to constitute D&O’s main wheelhouse. But that’s no longer the case: While public companies will remain loyal D&O clients for the foreseeable future, targeting smaller, privately owned firms could be the next fresh source of revenue for your agency.
State of the Market
Regardless of whether your D&O client is public, private or nonprofit, “in general, we’re in an era where pricing is relatively advantageous to the buyer,” says Kevin LaCroix, Esq., attorney and executive vice president at RT ProExec, a division of R-T specialty, LLC. “There’s plenty of capacity. And there have been new entrants into the marketplace over the last several months and years that are continuing to have an impact on the market.”
The recent boom of merger & acquisition activity has led to some increased frequency across the board for many D&O insureds. “It doesn’t matter if you’re private or public—you can’t be involved with an M&A today without getting some litigation,” says Peter R. Taffae, managing director at Executive Perils, Inc. “Somebody is unhappy. Either the acquirer in hindsight thinks they paid too much and there were misrepresentations, or the shareholders or investors feel they could have gotten more.”
Clarke says capacity on the private company side has created “intense competition” for business. “That results in lower prices,” he says. “Not dramatically lower prices, but it creates a situation where the incumbent doesn’t want to lose the business, and yet there are proactive attempts by non-incumbents to get their foot in the door with some dazzling pricing.”
Taffae anticipates 5–10% decreases for private companies and nonprofits, assuming a loss-free history and no major changes. But “the private D&O market is changing,” he says. “People used to think they’ll never have a D&O claim on a private company.”
Not anymore. In fact, moving forward, Bob Bregman, senior research analyst at IRMI, thinks prices are headed in the other direction. Instead of a decrease, he expects 7–12% D&O rate increases for private companies and 3–8% increases for nonprofits. “Even worse if they’ve had claims,” he says—potentially even steeper price increases than their public counterparts.
Why? “Private companies are getting sued more than they ever have been,” Bregman points out. And because D&O coverage tends toward the very broad under private forms, “any business screw-up is fair game for a lawsuit. The losses are amounting on the private company side much more than the public companies.”
Coverage developments affecting private D&O clients include insured vs. insured exclusions, which you’ll now find in almost every policy. The basis of the exclusion is that “carriers can’t insure internal conflict because then they’d be paying for both,” Taffae explains. “It’s like if you’re getting a divorce and you’re paying both spouses’ legal fees. You can’t win.”
It’s a potentially catastrophic coverage gap, but one Taffae views as an opportunity to prove your value to clients—many of whom often want to add two or three dozen additional insureds to a D&O policy. “I can’t tell you how frequently I have conversations with people who associate adding all these insureds with listing all locations in a property policy,” he explains. By contrast, in D&O, “most of the time when you add, you’re actually subtracting.”
In terms of coverage, more and more underwriters have also started offering the “whole management liability package,” Bregman says. “Once upon a time, the public companies had a separate D&O policy, separate EPL, separate fiduciary, separate cyber. Now even the public companies are trying to get all four of those in one shot.”
In Bregman’s opinion, it’s a better system: Management liability lines often have overlaps in coverage, insurance companies enjoy efficiency gains by reducing redundant efforts between departments, and clients often enjoy a sizable premium discount.
“Even if they have two employees, they’re going to buy EPL insurance,” LaCroix says. “And the cost of the D&O insurance on top of their EPL insurance is relatively minor. The aggregate premium you might pay over 20 years might seem like a lot of money, but it’s going to pale in comparison to what you spend in the 21st year when you get a D&O claim and you don’t have D&O insurance.”
Bonus: “When you sell a package, you reduce the chance of an agents E&O claim because you’re covering more of the waterfront,” Bregman says. “You’re also not buying separate lines from different carriers, so if there’s a loss, carrier A can’t point to carrier B and vice versa and say, ‘No, it’s yours.’”
But if you’ve ever tried to sell a D&O policy to a small, family-owned business, you already know you have your work cut out for you.
“Usually, the objection goes something like this: ‘We’ve been in business 30 years, we’ve never had a claim—what do we need D&O insurance for?’” LaCroix says. “To which I say, ‘I’ve been in D&O claims for 30 years and probably seen several thousand, many of them involving small private companies. And all of them, just like you, the day before they got sued, said they’ve never had a claim.’”
D&O tends to be low frequency, high severity: “You’re not going to have claims all the time,” LaCroix says. “It’s better to think of it more as a catastrophe tool. It’s really no different from your property insurance—chances are, in those 30 years, your building’s never burned down, either.”
The beauty of a D&O policy is that it’s an all-risk policy, rather than a named-peril policy like most in the insurance industry. “As a kind of business malpractice policy, D&O is the backstop of everything,” Taffae says.
For example, at press time, very few companies include cyber exclusions in their D&O policies. “The plaintiff doesn’t sue the directors and officers of Target for the cyber breach per se—they sue for mismanagement because the directors and officers didn’t address that exposure, and the value of the company went down,” Taffae says. “I wouldn’t be surprised if at some point in the near future [D&O policy cyber exclusions] are a standard thing. But right now, the ones that are doing it are outliers.”
That wide D&O backstop is helpful because claims can arise from many different directions, not just shareholders. “You can have claims by competitors, deceptive or unfair trade practice claims, claims from suppliers or customers,” LaCroix explains.
But shareholders are a threat to private companies in their own right. “A lot of people think that only public companies can have suits brought against them by shareholders, but that’s not true—any time you have minority shareholders in a private company, they’re very likely plaintiffs,” Bregman points out.
The same holds true for nonprofits such as condo associations—clients you might already work with on property or general liability. “Any condo association that doesn’t have D&O is an instant prospect,” Bregman says. “Frankly, anybody who sits on one of those boards without D&O coverage is crazy.”
When all else fails, try reminding private company and nonprofit prospects that they’re not just purchasing the indemnification of a D&O policy—they’re also purchasing the claims handling and defense expertise of the insurance company. “If you just go out and hire a lawyer, it’s not the same thing as having the insurance company a) figure out who’s the best lawyer and b) oversee the lawyer’s work,” Bregman says. “The insurance company rides herd on the attorney who they hire, and for that reason they tend to settle quickly.”
“If you’ve never had a claim, it’s very hard to picture how expensive it is,” LaCroix agrees. “Often you have a claim because your company has just had a very serious problem—a regulatory investigation, some very terrible disaster involving your product or property or one of your employees—and all of a sudden your name and the name of your company is on the front page of your local newspaper. At that point, you need to have experienced help.”
Jacquelyn Connelly is IA senior editor.
Public Company Barometer
In general, “since the big economic meltdown in 2008, public companies have not had anywhere near the D&O claim volume or the claim severity,” explains Bob Bregman, senior research analyst at IRMI. “That’s particularly true of securities class actions. The only thing public companies have had are merger objection claims, but even though they’re frequent, they’re not so severe.”
That means most public companies should expect rates to head upward, “but in a muted fashion,” Bregman says: If a company boasts good financials and hasn’t had claims in the past five years or so, it might face a 2–4% premium increase. “It’s hard to get premium now for public company underwriters,” Bregman explains. “I don’t see any big upward booms, and there are going to be some flat renewals too.”
“Large cap, Fortune 500, those are probably going to see some modest increases,” agrees Peter Taffae, managing director at Executive Perils, Inc. “The loss experience and the frequency of claims has actually increased, but I think the increases will be offset by the supply.”
But watch out for securities class action lawsuits if the stock market changes directions. The U.S. has enjoyed a bull market for five or six years, but “historically, they don’t last forever,” Bregman cautions. “This one’s getting a little long in the tooth. Any time you have a stock market that’s starting to tremble, there will be lawsuits—even if there’s no wrongdoing on the parts of the Ds and Os.” —J.C.