Winter Update: Hardening Liability Market

socThe past 2 years have seen several management liability insurance (“MLI”) carriers shift their underwriting appetite/guidelines for their non-profit privately-held California insureds. These changes include some combination of 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 of risk, financial condition and loss experience.

For the past few years, there has been a surplus of capacity from hungry MLI carriers to “pick up the slack” and write these accounts at attractive rates and terms. While there are still numerous other MLI carriers with significant capacity that will entertain MLI accounts in California, the marketplace appears to be reaching a point where this capacity will no longer be utilized to offer terms we have been accustomed to seeing in recent years. All of this begs the question, “Why is this happening?” Based on our conversations with many of the MLI carriers in this niche, here are a few of the reasons given:

• Poor economic conditions over the past 3 – 4 years leading to a significant spike in the numbers of EPL related claims
• EPL claims expenses rising dramatically year over year (remember these policies cover defense costs)
• Wage and Hour claims being far more prevalent than initially anticipated
• Significant uptick in D&O claims from assorted types of allegations (such as: bankruptcy related allegations, breach of contract, intellectual property and restraint of trade type allegations)
• Duty to defend nature of the policies forcing carries to provide defense costs coverage for otherwise excluded allegations

So, what can our current (and new) California-domiciled non-profit and privately-held management liability insureds expect as a result of all of the above commentary?
Our recommendation is to set expectations as follows:

• Increases in retentions and premiums.
– Smaller clients may need to absorb bigger increases (percentage wise) in premium and retention, although in many situations, their incumbent carrier will still be the best option if the increases are not significant.
– A reasonable degree of competition/capacity to still be available for the larger management liability clients, which can help mitigate increases in premium and retention.
• Defense costs coverage for wage and hour claims will be even more difficult to obtain, and when available, possibly more expensive to purchase and with possibly higher retentions.
• Non-renewals by some carriers, based primarily upon class of business. Some of these classes of business include:
– Real estate accounts
– Healthcare accounts
– Restaurant/retail

Late 2010, we alerted you to the fact that the MLI market appeared to be trending toward a hardening, following several years of softness. As 2012 ended and 2013 begins, nothing that has transpired is causing us to modify or alter that view. The gradual transition which we initially described in 2011 has in fact taken firm hold, and is gaining real traction. We hesitate to pronounce the market as officially “hard” at the present time only because we hear rumblings which suggest that – as the new year arrives – market conditions could very well deteriorate further – to the point that the label “hard market” may indeed be stating the obvious. For the moment, the watchword 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.