Trends are often hard to see coming until, one day, they bring about enough pain to get everyone’s attention. Commercial auto has been feeling the sting of social inflation, the trend once dubbed the “culture of fault,” for nearly a decade. Now, other liability lines, particularly directors & officers (D&O), are feeling the burn of a growing societal shift toward aggressive accountability in the legal system.
In short: American juries are more likely today to award large D&O settlements due to a growing distrust of corporations and their leaders; shareholders are more likely to sue publically held companies for decisions leading to losses; employment practice lawsuits are more likely to spill over to the D&O policy, as the feet of individual executives and board members are held to the proverbial fire; and public and private boards alike are increasingly being held responsible for event-based failures and damages, especially with regard to cybersecurity and data breaches.
To be clear, the social inflation we are seeing today in the U.S. is not born of the same ‘healthy mistrust’ of conglomerates and institutions that we, as Americans, are born to. Lawsuits are increasingly targeting medium-sized businesses, even entrepreneurial and start-up ventures. Plaintiff attorneys have become very good at the “they should have known better” argument, and juries today are more easily swayed as to whom, exactly, constitutes they.
In the 2019 report, “Emerging Multinational Management Liability Risks,” global insurer Chubb examined the social inflation trend and its impact on D&O insurers and insureds, who analysts predict will see unprecedented rate increases in the coming year. Privately held firms and non-profits will maintain access to market capacity, with rate increases in the 5-25 percent range, while publically held companies will see increases of at least 18 and as high as 80 percent, with diminishing access to markets.
The report states: “Significant regulatory reform, the growing willingness of courts and regulators to hold individuals accountable, an increasingly active and engaged shareholder pool, and a heightened compensation culture, have all led to D&Os facing a constantly evolving set of exposures—including regulatory fines, criminal sanctions, civil liabilities, and shareholder claims.”
An upcoming U.S. Supreme Court ruling could further impact D&O rates, the availability of capacity and underwriting terms, in instances where a jury finds that an insured benefitted from “ill-gotten gains” at the expense of shareholders. The litigation stems from a case brought by the Securities and Exchange Commission but has broad implications for exposures typically not covered by a D&O policy.
Insureds are not powerless in this problematic culture of fault, fortunately. Carriers that specialize in the D&O space have indicated a willingness to waive significant rate hikes for new clients that can demonstrate financial health and wellness. Talk to your Sentinel Risk Advisors broker about your firm’s D&O exposures, determine your current carrier’s appetite for the risks you face today as well as emerging risks, and explore marketing options to secure the best possible rates and coverage with carriers who specialize in D&O and are willing to compete for your business.
