The directors and officers (D&O) insurance marketplace may have seen significant price increases this year, but the challenges in the line of business started long before the coronavirus pandemic hit.
“Generally, before COVID, the market was already hardening in terms of increasing costs, and the reason why is because there has been an incredible increase in litigation and related costs, and the cost of D&O insurance just hasn’t been keeping up with it,” said Heather Fong-Quade (pictured), head of product development for financial lines at Allianz Global Corporate & Specialty (AGCS). “The carrier losses have increased, and then also the [litigation] costs themselves have increased.”
While the cost of litigation varies from company to company, many estimates point to firms spending billions of dollars annually on lawsuits. For instance, according to the 2020 Carlton Fields Class Action Survey, corporations spent $2.46 billion on class action litigation in 2018 and $2.64 billion in 2019. The report projects that for this year, corporations will spend $2.73 billion on class action suits, and that in-house legal spend will continue to climb in the coming years because of the coronavirus and new data privacy laws.
Given this financial pressure, it was no surprise that the cost of D&O insurance spiked, regardless of the current pandemic situation, explained Fong-Quade, adding that the E&O market has seen similar changes for certain types of insureds. “That again has to do with the frequency and severity of the losses having increased over time, and the market hasn’t kept up,” she said.
Additionally, on the carrier side, low interest rates have meant that carriers have been earning less on their own investments, so there was going to be a breaking point where they couldn’t keep up with the losses, noted the AGCS expert – a breaking point that the market had hit already before the pandemic.
Carriers, including AGCS, were re-examining their limits and management strategies for D&O to adapt to the headwinds. At the same time, event-driven litigation, such as the #MeToo movement and diversity suit litigation, as well as excessive fee litigation, were growing in numbers.
Today, says Fong-Quade, “More and more insureds are looking at D&O as defense cost coverage, because a lot of times these cases are not going all the way to court, but the defense costs themselves are increasing as litigation increases. It’s also becoming a lot more complex, especially now that we have e-vendors and all sorts of data mining that has to be done in terms of discovery on cases, and that has increased the cost of litigation.”
The impact of COVID-19 on future litigation will, meanwhile, be significant. After all, whenever there are restrictions, like the current lockdowns, within the economy, companies are going to see problems with their distribution chains – and because COVID is a global pandemic, there’s been a lot of disruption in the supply chains, “which always leads to litigation,” said Fong-Quade. In the case of the pandemic, the costlier lawsuits aren’t necessarily going to come from individuals suing firms.
“What happens with stuff like COVID is that you start seeing business partners having disputes with you. Those can get a lot more contentious and a lot pricier,” continued Fong-Quade. “They’re also a lot more personal and people are less willing to settle them … so we expect the COVID-19 disruptions to continue to increase the litigation that’s out there.”
