By: Paul Lefcourt, Co-Founder and Management Liability Practice Leader 

Over the past year, several management liability insurance (MLI) carriers have changed their underwriting appetite/guidelines for privately-held D&O and EPL risks, nationally and most dramatically within California. Instigated primarily by many years of competitive underpriced premiums and broadened terms that have been unable to support escalating losses, these changes typically include one or more of the following:

• Increased rates
• Increased retentions
• Reductions in coverage
• Reductions in total limits offered
• Reductions or removal of wage and hour defense cost sub-limits
• Non-renewal of insureds based upon industry, asset size, financial condition and/or loss experience.

This current shift is being fueled by an expansion of the types of allegations and size of monetary demands in claims being brought under Private D&O policies. This is occurring not just on larger accounts or “unicorns” (private accounts with $1B+ valuations), but also on many small – medium sized insureds. The #metoo movement is simultaneously driving up defense costs as well as demand and settlement amounts under EPL policies. 

This is quite a change from the previous 3 – 5 years, when there was a surplus of capacity with MLI carriers, eager to write these accounts at competitive rates and terms. While there are still numerous MLI carriers with significant capacity, including some new entrants, the marketplace appears to be reaching a point where this capacity will no longer be utilized to offer the terms and pricing that we have been accustomed to seeing. All of this begs the question “Have MLI claims really gotten worse?” The answer is “yes,” most notably in California as well as a few other tougher states such as FL, IL, NY, and NJ. Based on our discussions with MLI carriers, they are experiencing numerous adverse claim trends:

EPL

• EPL plaintiffs are as aggressive as ever and emboldened by the #metoo movement (especially in California)
• EPL plaintiff attorney fees keep increasing, along with costs for the experts they hire, and discovery and other defense costs are also skyrocketing
• EPL wage and hour claims have not slowed down
• Claims have increased even though the economy has been stable and growing, with near-record-low unemployment

D&O

• Contractual and intellectual property (IP) suits have increased, including allegations of theft of trade secrets and/or breach of non-compete agreements against employees when leaving a company
• Traditional IP allegations (trademark, patent, etc.) are on the rise. Typically, these are the most costly allegations because they include defending multiple interests and require many expert witnesses as well as complicated discovery, driving up costs
• Duty-to-defend policies, which allocate 100% of defense costs to covered allegations, are driving up costs as carriers are contractually required to defend persons/allegations not historically covered under policies
• Antitrust exclusions (especially those with the broadest exclusionary language) and SEC exclusions are coming into play more frequently, with the SEC reviewing private company activities more closely than ever before, including “unicorn” companies
• Claims by regulatory agencies are increasing, which are very expensive to defend and settle. Some of the agencies in question include the Consumer Finance Protection Board (CFPB), the Federal Trade Commission (FTC), the Department of Justice (DOJ), and the Security Exchange Commission (SEC), as well as new allegations relating to the Fair Credit Reporting Act (FRCA) and the Telephone Consumer Protection Act (TCPA)

What can our current and new privately-held management liability insureds expect as a result of the changes in the marketplace? We recommend that brokers set client expectations as follows:

• Increases in retentions and premiums.
  • Smaller clients will need to absorb bigger percentage increases in premium and retention (as well as possible reductions in coverages), although in many situations, their incumbent carrier will still be the best option if the increases are not outrageous
  • A reasonable degree of competition/capacity will still be available for the some management liability clients. This may help mitigate increases in premium and retention
  • Increases will be felt by insureds located in major cities in CA, FL, IL, NY & NJ as carriers generally still like risks in smaller cities.
• Coverage for the defense of wage and hour claims may be more difficult to obtain, and when available, likely more expensive to purchase and with possibly lower limits and/or higher retentions.
• Non-renewals by some carriers, based primarily upon class of business and/or location. Some of these classes of business include:

We expect carriers will be asking for more underwriting information than they have previously, especially if the insured has challenging financials, the insured is seeking additional funding or has a challenging loss history.

Given the above trends, Socius has been advising our clients for the past year that the MLI market appears to be trending toward a hardening, following on the heels of numerous years of softness. Today, we continue to believe that this is the case. The gradual transition which we initially described has in fact taken firm hold, and is gaining real traction. We hesitate to pronounce the market has officially become “hard”, only because we hear rumblings which suggest that—as we proceed further into 2019—market conditions could very well deteriorate further, making what we consider hard today, even “harder.” For the moment, the warning to agents and brokers is: Manage expectations! Difficult news is coming, so let clients know early and often. 

As always, please don’t hesitate to contact your local Socius representative for further details related to appetite changes of any specific management liability markets. 

Please contact your Socius producer to discuss available coverage solutions.

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