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4 Critical D&O Coverage Elements to Discuss with Your Clients

Once you convince a commercial client that directors & officers insurance is worth the investment, here are four coverage elements to keep a close eye on in 2019 and beyond.
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Most publicly traded company directors & officers understand the importance of purchasing D&O insurance.

But if you’re trying to sell D&O to a private company or nonprofit, you may have your work cut out for you—possibly because many buyers don’t realize that D&O liability is different from any other kind of insurance in that it protects the personal pocketbooks of company executives.

“With a D&O policy, the underlying liability itself is personal liability,” says Kevin LaCroix, Esq., attorney and executive vice president at RT ProExec, a division of R-T specialty, LLC, and author of the D&O Diary. “If a company’s insolvent and there’s no insurance, the only place claimants can go to seek redress is the assets of the executives.”

It’s an especially important selling point at a time when “more and more lawsuits are targeting individual directors & officers as opposed to the board as a whole,” says Sean Jordan, senior research analyst, International Risk Management Institute.

And as hot-button issues like merger objections, cyberattacks and the #MeToo movement continue to drive D&O-related litigation, “it’s becoming more difficult to underwrite exposures that could wind up being turned into D&O risks,” LaCroix points out. “That includes not just cyber and #MeToo, but also things like climate change, supply chain disruption—you have to underwrite for the future, not the past. Underwriters are trying to think about where the claims of tomorrow will come from.”

The only way to adequately price for such unpredictable new risks, LaCroix says, is “to get some compensation for the uncertainty. Along with deteriorating claims experience, that’s one of the contributing factors in why we’re starting to see an increase in D&O rates.”

It’s also one of the factors behind stricter terms and conditions in D&O policies. Once you convince a commercial client that D&O insurance is worth the investment, here are four coverage elements to keep a close eye on in 2019 and beyond:

1) Cyber scrutiny. D&O underwriters are becoming “increasingly more interested in board-level engagement with the cyber controls businesses create and implement,” says Paul Larson, senior vice president of financial institutions and management liability, E&O and cyber, CNA Financial Corporation. “D&O underwriters feel they need to gain more comprehensive understanding of the cyber placements insureds purchase, especially if they operate in industries more susceptible to a cyberattack.”

So far, LaCroix says that mindset has yet to appear in black and white in D&O policy language. “There’s still enough capacity in the marketplace that there’s resistance for things like cyber exclusions,” he says.

But Jordan points out one large insurer that recently added a very broad cyber exclusion to its D&O policy. “That was something we really hadn’t seen much of, and I can’t say we’ve seen many others,” he says. “I don’t know that an exclusion of that breadth is ever going to become commonplace, but before long, a narrowly worded cyber exclusion is something you might start seeing more in D&O forms.”

2) State court retentions. Thanks to the Cyan, Inc. v. Beaver County ruling that the Securities Litigation Uniform Standards Act of 1998 does not strip state courts of their concurrent jurisdiction over class actions asserting violations of the Securities Act of 1933—and does not empower defendants to remove such suits to federal court—fewer D&O insurers are willing to insure companies making initial public offerings.

Those that will provide IPO-related coverage are tightening terms and conditions, such as by applying state court retentions “which are greater than the entity’s securities claim retention,” Larson says. “With publicly traded companies where there’s a meaningful tower of excess layers, agents should pay attention to how excess policy language responds to the sublimit for shareholder derivative investigation cost in the primary policy.”

The sublimit is usually between $250,000 and $500,000, says Larson, who notes that the cost of such claims can quickly exceed $1 million. “If the excess layers fail to specify or address this issue through affirmative dropdown sublimits, these costs could be borne by the insured,” he cautions.

3) Public relations expense coverage. “Given the fact that there’s been so much event-driven litigation and so many headline-grabbing, scandalous types of claims,” Jordan says, this type of coverage is becoming increasingly important on D&O policy forms. But it’s an area that can vary substantially between carriers, “and you’re still seeing plenty of forms that don’t have it,” he warns. “That’s a big thing to look out for.”

Even if the coverage is included, how does the policy define “public relations expense”? For example, “some forms will include something like a mental health firm, but for others, it’s more strictly a public relations firm,” Jordan explains. “Some will explicitly say they provide coverage even if no capital-C Claim is brought, as defined by the policy, but some of them don’t include that allowance.”

Still other policies may include a limited list of specific events that trigger the coverage. And pay close attention to whether that list uses language like “including the following” or “only the following”—it’s an important distinction.

Jordan adds that “it’s not only about what’s on the list, but also the thresholds on the list. Maybe ‘layoff’ is an event on the list, but is it a 20% threshold? Is it a 30% threshold? There are all kinds of levels regarding how each insurer handles that provision.”

4) Antitrust exclusions. Larson has also observed a heightened underwriting focus on antitrust concerns, “specifically with health care and life sciences companies,” he says. “Coverage is available in the market, but we often see this with a sublimit or a coinsurance factor applied to it.”

Like public relations expense coverage, this is an area where “the terms and conditions that are available vary widely and really depend on the negotiation process with the carrier,” LaCroix says. “I’m sometimes surprised when I’m brought in to look at a program, even a fairly sophisticated private company program, and it’s clear that nobody’s looked at it in years. They don’t have a state-of-the-market policy.”

For example, most leading carriers’ base D&O policy forms contain a fairly broad antitrust exclusion, which not only excludes claims brought under state and federal antitrust laws but also precludes coverage for unfair trade practices, deceptive trade practices and unfair competition.

“The problem for many buyers, particularly private-company buyers, is that when a private-company D&O claim is filed, usually they’re numerous claims brought together, and it’s fairly standard to include an unfair competition or deceptive trade practices claim,” LaCroix explains. “If you’ve got one of these broad form antitrust exclusions, it may be that a substantial part or even all of the claim is excluded from coverage.”

The irony, LaCroix adds, is that most carriers will remove the exclusion upon request—“but you have to ask for that,” he points out. “Or, for certain companies in certain industries, they may not remove the exclusion outright, but they’ll provide sublimited coverage that’s subject to coinsurance or to a separate higher self-insured retention. In a competitive marketplace, it is going to be possible for most buyers to find an alternative that does not have an antitrust exclusion.”

“These aren’t marginal things—this isn’t one of those technical, only-interesting-to-an-insurance-nerd kind of issue,” LaCroix adds. “These are exclusions that come into play on many claims.  These are really coverage-differentiating features that need to be tended to, because if they’re not, it can make a huge difference in the event of a claim.”

Jacquelyn Connelly is IA senior editor.