Helping management address liability exposures
D&O for public, private and nonprofit companies covers a multitude of risks
By Dave Willis
Organizations today face myriad management liability concerns. "In our experience, small to mid-sized private companies and nonprofits have a wide variety of business risks from investors, vendors and suppliers," explains Helen Ryan Savaiano, president, Management Liability, at The Hanover Insurance Group, which provides D&O coverage for small to middle market private companies and nonprofit organizations nationwide. "In addition, they have exposures associated with employees."
What's worse, she notes, is that many small to mid-sized organizations are not aware of these exposures. "As a result, they may not have the right coverages or any coverage at all," she says.
The economy plays a role in the management liability marketplace. "Reduced revenues over the past few years have made firms very cost conscious," she explains. "While we've seen increases in job growth and consumer spending, there is not yet enough confidence in an economic recovery for the market to experience major positive financial impact."
Wayne Andersen, chief underwriting officer, Management Liability, for Travelers Bond & Financial Products, sees similar economic fallout. "If you are a small Main Street operation, you're challenged to retain business dollars and retain customers," he explains. "Fewer businesses are competing for fewer customers, which leads to increased disputes with competitors as companies fight for survival." Mergers and acquisitions lead to claims for private companies, too. "While it's more acute in the public sector, any time there is M&A activity, there's a strong likelihood of claims," he adds.
"Private companies face growing exposure in the areas of bankruptcy, breach of contract, competitor law suits and intellectual property," explains Salvatore Pollaro, managing director, Management Liability, at Markel, which insures a range of nonprofit organizations and private and public companies. "Recent passage of the JOBS Act will likely lead to more claims and litigation in the areas of investor disclosure, shareholder dilution and shareholder class action." Regulatory and anti-trust exposures also have grown considerably.
Andersen says employee piracy is another potential risk that private firms encounter. "Believe it or not, even in a challenging economic environment, we have seen situations where companies are trying to find talent," he explains. "They need people who can sustain their business. We've seen a growing number of claims related to that."
Public companies' largest exposure continues to be SEC shareholder class actions, says Pollaro. "However, they too are seeing an increase in regulatory and bankruptcy claims," he adds. Andersen, whose firm serves private companies, nonprofit entities, publicly traded companies and financial institutions, concurs. "We've seen our share of bankruptcies and public companies being challenged by the economic climate," he says.
"With that comes stock volatility," he adds. "We continue to see public companies and the directors and officers face their share of security class action claims." Such activity has been lower than normal in recent years, he notes, but that may be changing. Shareholder activism also seems to be on the rise, he says.
"We're also seeing increased activity from governmental agencies," he says. "The big thing out there is the Foreign Corrupt Practices Act. The Department of Justice and the SEC are paying much closer attention to how publicly traded companies conduct business, not only in the United States but abroad."
Nonprofits are not immune to management liability issues. "Our D&O products include employment practices liability. Employment-related claims—wrongful termination, discrimination and sexual harassment, for instance—are by far the most significant D&O-related issue our insureds' boards face," explains Riley Binford, CIC, executive vice president at Charity First Insurance Services, which serves nonprofit, social service and religious organizations.
"In addition," Binford says, "many nonprofits and social service agencies sometimes handle funds for others in a fiduciary capacity, which is another exposure nonprofit and social service boards face. Also, allegations of misuse of funds or misappropriation of funds are not uncommon for boards of nonprofits and social service agencies."
Pollaro says nonprofit risks need to be concerned about exposures in the areas of regulatory and anti-trust litigation, stakeholder claims resulting from the loss of revenue funding and service restrictions, and large donors scrutinizing the use of specifically earmarked endowment funds.
"In addition, nonprofits and other social service organizations dealing with children have a heightened exposure to potential abuse and molestation claims," he adds. "Some recent high-profile incidents have brought this to the forefront."
According to Andersen, "The recession has made it extremely challenging for nonprofits to maintain funding levels," he says. "The last thing they can afford is expensive litigation. Defense costs really can affect a small nonprofit."
Protecting directors and officers
Insurance products are ready to respond to management liability exposures. "As a whole, the market has advanced the products and policy forms to a point where coverage is quite significant," says Pollaro. "It addresses many potential exposures buyers may face."
Savaiano concurs. "Coverage broadening has been a trend," she explains. "Today, many losses that were not historically covered by D&O insurance, such as breach of contract, some regulatory fines and fees, and other matters that had traditionally been thought of as 'business expense' and 'overhead'" are now more widely covered."
Fortunately, D&O insureds have enjoyed plenty of supply and capacity in recent years. "This has led to ever-softening of pricing," Savaiano adds. "Indeed, year over year decreases in premium have been commonplace."
She is starting to see a shift here, though. "A transition is now emerging away from the 'soft market' cycle, where carriers aggressively discounted premiums and broadened coverage in a rush for top line revenue and market share," Savaiano explains. "As the market begins to firm, the result for many D&O policyholders, even those with strong governance and good financial results, will be an increase in premiums and narrowing of coverage."
Pollaro agrees. "We began to see an uptick of rate increases at the end of the fourth quarter of 2011," he says. "We expect to see this trend continue. In all likelihood, absent a market-changing capital or environment event, the pricing trend should be gradual over time and not spike immediately." He warns those in the management liability marketplace to prepare for rising prices.
Again, nonprofits are facing the same scenario. "The nonprofit D&O market is currently in a 'firming' process," explains Binford. "We're seeing increases in premiums and retentions and, in some cases, reduction in coverage." Still, he adds, availability of D&O for nonprofits is still fairly broad. "I don't believe you could call it a hard market," he says.
In the midst of a changing environment, insureds and advisors need to focus on coverage. "It's important that the coverage is built for the individual exposures of each insured," explains Andersen. "When you look at the nonprofit space, coverage as a whole is broad. The private D&O coverage form is broad, but that's something insureds have come to expect and something that continues to be offered in the marketplace."
In the public space, he adds, coverage for securities class action litigation and mergers and acquisitions litigation requires special focus. "Several years ago, if a company were engaged in merger and acquisition activity, there was a chance some sort of M&A claim might be brought against them," he says. "Today, studies show most public companies engaged in M&A activity receive an M&A claim. This is driving underwriting response in the form of increased self-insured retentions, unique M&A retentions, or other underwriting responses."
According to Savaiano, D&O presents an opportunity for agents and brokers to provide a total solution for their clients. "They can round out their coverage by insuring this important risk," she says. "An important part of this is educating prospects and clients on the exposures they face."
She says that individual D&O purchasers and current non-buyers of these products are inclined to rely heavily on trusted and knowledgeable agents and brokers to assess their unique needs, and to determine an appropriate amount of coverage at a competitive price point for them.
Addressing management liability exposures requires diligence. "One of the most important services an agent or broker can provide customers is to deeply understand their risk profile, so they can explain with clarity the positive attributes of their risk to their markets," explains Pollaro. "Also, it is critically important to be informed on emerging exposures and the great variance in coverage products and policy language from one carrier to the next. It seems like a moving target, at times."
Andersen agrees. "From an underwriter's perspective," he says, "insureds are best served when producers sit down with clients and understand their exposures. Our underwriters can provide the best insurance solution when they truly understand the insured and its associated risks. A lot of this originates with the producer understanding their own insured and gathering as much information as possible."
Producers also need to understand the markets they work with. "They need to understand their longevity and expertise in the business," he notes, "and try to marry up the insured with the right market—one that has the expertise, strength and long-term commitment to the business."
Savaiano says, "The best agents and brokers form deep direct relationships with carriers that let them have personal relationships with their D&O underwriters. They have a single point of contact who both initially underwrites the risk and also renews it." Good agents and brokers also advocate on behalf of their customers.
Binford encourages agents to point out the value in the coverage. "Nonprofit D&O is still reasonably priced," he says. "It is quite the bargain for what you're getting. You're basically protecting a board, the organization, its employees and volunteers from mistakes they might make running the organization."
He adds, "In many cases, for less than $2,000 a year, an agent can protect an organization from suits alleging wrongful termination, discrimination, harassment, misappropriation of funds, and many other claims—including those that involve an individual who is simply upset with a decision the organization made."
It's such a bargain, he says, that if the organization balks, the agent should suggest they buy it and allocate the premium among the board members, who would pay for it personally. "It's that valuable," he notes. "Often, nonprofits don't even realize they don't have D&O. In fact, it can be used to get a foot in the door."
Andersen also sees value in addressing nonprofit D&O. "Most folks in the nonprofit arena believe they are insulated from many exposures," he explains. "Understanding the value a nonprofit D&O policy offers, particularly related to defense expenses, is important. Folks get involved in a nonprofit because of a benevolent cause. They are trying to do good, and they don't necessarily think about how their good works carry with them an element of risk."
Pollaro says the JOBS Act should drive more public and private companies to consider buying D&O coverage. "The barriers to accessing capital have been minimized," he explains. "This will create new exposures for businesses, and those brokers who identify these possible pitfalls up front and work to craft viable solutions should see their acquisition and client retention grow accordingly."
According to Savaiano, market tightening may provide a chance for agents and brokers to grow their business. "Reduced limits or withdrawn coverages at renewal will mean market opportunities," she says. "This will make partnerships between agents and carriers more important than ever. Agents and brokers should align with carriers that look at risks individually and price them fairly, instead of those making broad sweeping price increases and coverage cuts."
Adds Pollaro, "The most important thing to keep in mind is the market has started to change. With change, comes greater need for clear, consistent and frequent communication with insurance markets. The better agents and brokers can help underwriters understand and identify risk exposures, the better positioned they will be to offer viable solutions to meet the needs of their insureds."
Dave Willis is a New Hampshire-based insurance freelance writer and regular Rough Notes magazine contributor.