Three Top Underwriting Concerns for US Private Companies
Premium pressure for private and family-owned companies purchasing directors and officers’ (D&O) liability insurance has decreased. But many underwriters are still exerting extreme caution when taking on risk, often leading to endorsements and coverage limitations that could result in significant expenses for insureds.
Despite increased competition, private company D&O insurers are concerned about the increasing cost and frequency of losses. Amid increased scrutiny, underwriters are requesting more information from insureds and often introducing restrictions to their coverage terms.
This requires insureds to continue to carefully examine their policy language and fully understand the coverage they are purchasing to protect their businesses and their people. And clients should work with their brokers to limit—and where possible eliminate—coverage restrictions.
What Is Worrying Underwriters?
Underwriters are carefully scrutinizing each application and treading with caution when deciding whether they want to take on private company risk. Their focus is mainly on these three concerns:
1. Claims by Shareholders Lacking Board Representation
Concern over litigation by shareholders or other stakeholders about a gamut of issues—including reduced company profitability—is top of mind for insurers, especially considering the significant cost of these often-contentious lawsuits. Their concerns are intensified in relation to shareholders without board representation suing a company for decisions that adversely impacted them. These types of arguments often revolve around the suggestion that a lack of representation prohibited the shareholders from contesting a particular decision. This also applies to family-owned companies where the board or executive leadership lacks representation from the family or where some family members with a stake in the company are not involved in family decisions at the board or executive leadership levels.
Conscious of this persistent risk and the potential of expensive litigation, many underwriters are including an endorsement to their policy language, excluding D&O coverage for claims coming from or on behalf of shareholders who lack board representation. While insurers have used similar endorsements for several years, the risk of litigation has made these limitations more common now.
Insurers may also include an endorsement limiting or excluding coverage for litigation from shareholders—whether or not they have board representation—when there is insufficient shareholder and board representation information. To reduce this risk, it is important to work with your broker to address any concerns raised during the underwriting process, including by providing a list of shareholders and their representation on the board.
2. Fear of Antitrust Losses
Another area that continues to worry underwriters is the risk of D&O claims stemming from antitrust enforcement actions under laws intended to increase competition and protect consumers. Especially concerning is that these enforcement actions can lead to expensive and protracted litigation.
Some insurers have remained silent in their policies on the issue of antitrust coverage, which has led to uncertainty as to whether a potential claim would be covered. Others are responding with affirmative coverage, either by sublimiting coverage for antitrust losses or providing full coverage with no sublimit; both can lead to increased deductibles. Some private companies, especially those in the health-care industry, are also facing coinsurance requirements.
Despite the potential for additive premiums to obtain antitrust coverage, the nature of antitrust losses makes it prudent for private companies to continue seeking the most comprehensive coverage possible that provides extensive protection for directors, officers, and the organization. Securing affirmative coverage and maximizing limits can reduce uncertainty following an antitrust enforcement action.
3. Bankruptcy Risk
Many businesses, including private companies, have a heightened risk of bankruptcy during challenging economic periods, which could lead to litigation from both secured and unsecured creditors. Directors and officers are also at risk of being sued by shareholders or other stakeholders for breach of fiduciary duty for failing to safeguard the company’s financial health. Further, financial distress can lead to employment-related decisions, such as extensive layoffs, which can also increase the risk of litigation.
Since private companies often bundle D&O coverage together with coverage for employment practices liability, insurers are concerned about the wide-ranging implications of bankruptcy. And while claims arising out of bankruptcy are not always enforceable, many underwriters are restricting coverage or fully excluding bankruptcy-related claims.
All efforts should be made to partner with underwriting companies that will not require these restrictions or to work with your broker or insurance advisor to address underwriting concerns to facilitate their removal. Starting the renewal process early gives private companies time to discuss their financial risks with insurers and present information that can help alleviate insurer concerns about the company’s ability to weather a difficult economic period.
As the risks of litigation, antitrust losses, and bankruptcy remain high, D&O insurers are expected to continue to exert caution when offering coverage to private companies. It is imperative to continuously communicate with your broker or insurance advisor to review your risk profile. Be prepared to answer underwriter questions fully and in a timely manner. And, as insurer competition continues to increase, consider marketing your program to increase your odds of securing the most appropriate coverage for your risk.
John Tiesi is a managing director and placement specialist at Marsh.