Is D&O insurance now the most important cover you can have?

This final article of our three-part Directors’ and Officers’ (D&O) article series summarises the marketplace and issues surrounding D&O insurance today and explores how despite its ‘optional’ perception, it may be the most important cover you could have over the next 12-24 months.

In its D&O market report published at the end of 2019¹, Allianz highlighted the risk of “bad news” litigation as a top mega trend for 2020. The insurer expected to see more claims against directors and officers coming from a range of non-financial and fiduciary related scenarios – including man-made and environmental disasters, corruption and cyber-attacks.

Coming before the coronavirus pandemic, and the subsequent dramatic falls across global financial markets, this analysis shows considerable presence of mind.

For directors and officers of UK businesses, the pandemic has been a “bad news” event on a scale not seen since the financial crash of 2008. While the short-term impacts have been punishing for many, and the longer-term consequences are yet to emerge, there looks to be choppy water ahead.

It seems likely that, for those enterprises less prepared and worst hit, the potential for a wide range of actions is significant. Should directors and officers be found to have made mistakes in the development of appropriate risk management and preparedness strategies prior to the COVID-19 outbreak, they could face actions from a broad range of stakeholders including employees, customers, creditors and regulators. In our second article of this three part D&O series we explored the risks to Directors and Officers from COVID-19 in more detail.

The need for D&O insurance is not just a public company issue where there is the threat of shareholder action.

In this unique environment, directors and officers of all private enterprises across a wide range of sectors – from care to retail to manufacturing, construction and personal and professional services to name only a few – may be held responsible for their failings in respect of suitable COVID-19 policies and procedures. This could be arising from day-to-day operations, effective longer term planning and employment related issues including employee wellbeing and management of redundancies as we move out of lock-down and into a very challenging economic environment.

D&O insurance for private companies is commonly provided under the umbrella of Management Liability insurance. Providing protection for both the directors’ assets, and the company’s, from a wide range of actions and allegations, including from employees.

Rising costs of D&O protection

Ensuring you’re appropriately covered with D&O insurance is one of the best ways to insulate you from the financial implications of any action brought against you personally, or any investigations by regulators into your actions. As with most insurance policies, there are of course exclusions, so it’s important you engage with your advisor to have these explained to you.

But while it’s easy to say, we also appreciate that cost containment is a key priority, and you’re rightly evaluating all your business costs – insurance included. And unfortunately, the cost of D&O insurance is rising.

As we see in figure 1, prices rose an average of 35% in 2018 and by 46% in 2019², and show no signs of slowing.

The net effect is that directors and officers looking for new policies, or renewing existing ones, will face considerable increases in premium.

In our first article of this series we looked at the D&O market in more detail.

Figure 1.

Challenging priorities

This is undoubtedly unwelcome news for directors and officers. Many are now faced with choosing between protecting themselves against uncertainties surrounding the wider economic outlook, litigious environment and employee actions in some cases, and the need to reduce costs and avoid further financial outlay in the short term.

That choice is made harder still because D&O is only one part of the wider insurance portfolio and, unlike employer’s liability insurance for example, is not a legal requirement. Going beyond larger private and publicly listed companies, there is also the perception that, perhaps because of this lack of legal mandate, D&O insurance is a ‘nice to have’ option rather than a recognised business cost (such as public liability, buildings and contents insurance, etc.).

Cyber risk insurance also sits in this ‘optional’ box and faces a similar perception. Although, directors and officers are potentially at risk under GDPR regulations (and others) should inadequate security controls result in a data breach or business-interrupting cyber-attack. This threat is growing as more people work remotely and from home.

While both D&O and cyber risk insurance are certainly discretionary, they are increasingly critical to ensure individuals and companies are protected in today’s risk-laden operating environment.

Mitigate and protect

We absolutely recognise the challenges you face and the pressures you are under as directors and officers. Focusing on the success of your company may sometimes mean claims will be brought against you – even false claims can incur significant cost to defend. Without the comfort of adequate insurance you may be putting your personal and company assets at risk. 

This is an unenviable choice, and we have experience helping clients navigate these very difficult conversations. As advisors, our role is to work with clients and our panel of insurers to provide the best available cover, at the best price available in the market. So what can you do?

Certainly, insurers are more cautious in this market, asking more detailed questions and requiring more access to senior individuals within the company. Underwriters too will be applying increasing scrutiny when deciding whether to take on a risk. To avoid unwelcome surprises, it pays to be prepared for your D&O renewal by engaging advisors capable of interpreting and assessing both current levels of cover and those being offered at renewal.

While it is important to start the process early, you should be prepared for significant changes on short notice given the market’s fluidity and volatility. Keeping in close contact with your risk advisor to understand and navigate the evolving market is essential.

Ultimately, with the growing potential of action against directors and officers, and despite premium levels trending up, D&O insurance could very well be the most important cover you can have today. As ever, we will do all we can to help mitigate your risk in this challenging market.

That concludes our three part article series on Directors and Officers' insurance. We hope you’ve found it helpful and insightful. If you would like to know more about management liability and D&O, visit our dedicated web page here. For more information related to the COVID-19 pandemic, please visit our Coronavirus Resource Centre, which is updated regularly with the latest information and advice on the situation.


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^Sources

^{[1] https://www.agcs.allianz.com/content/dam/onemarketing/agcs/agcs/reports/agcs-DandO-insurance-trends-2020.pdf}

^{[2] https://www.marsh.com/uk/insights/research/d-and-o-liability-insurance-2019-pricing-index.html}