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.

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Can the D&O policy be amended to provide coverage for named positions?

We receive this question quite a bit. The standard Directors and Officers contract provides protection only for corporate directors and officers. However there are other, potentially non-officer positions that may be subject to being named in a suit such as General Counsel or Director of Investor Relations. These, and other positions can be named on the policy and coverage provided for these otherwise exposed employees.

As always, if you have any questions please don’t hesitate to contact your Socius representative.

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Employer Lawsuits on the Rise

With two office locations in Florida, we felt we should report on a trend that is being seen. More employees are suing their employers. According to the U.S. Department of Labor reports the number of lawsuits related to the Fair Labor Standards Act  increased by 35 percent in the past three years.

That’s enough to make any employer shake in their insurance policy boots. Is your organization fully covered with Directors, Officers and Corporate Liability and Employment Practices Liability? Contact a Socius agent to have your policies reviewed and avoid an unnecessary risks.

For the full article on rising lawsuits, click here.

 

What is the Spousal Extension?

We receive quite a few questions regarding Management Liability, this being one of them. Here is our description of Spousal Extension.

If a Director or Officer is sued in a community property state, plaintiff’s bar often sues the spouse as well so as to be able to access community property assets. This provision extends coverage to the spouse as well to address this potential exposure.

As always if you have any questions,  please don’t hesitate to contact your Socius representative.

Duty to Defend

This paper discusses the most important features of the defense section of a typical management and professional liability policy. These features have the most impact on how a claim is handled once it is tendered to the insurance company, and are important to understand.

Duty-to-Defend vs Non-Duty-to-Defend – In a duty to defend policy, the Insurer has the duty to defend a claim once it is tendered. In a non-duty to defend policy, the Insured has that obligation. Most middle market professional liability policies and D&O/EPL policies for private companies and non-profits are written on a duty to defend basis. Most public company D&O forms are written on a non-duty to defend basis. Here are some pros and cons of each:

Duty to Defend
Pros:
– The insured gets access to the insurance company’s panel counsel list, or is provided a defense by a firm selected by the insurer. These are usually experienced attorneys and they usually work for pre-negotiated rates.
– The Insured gets to hand over the claim to the insurer, who does most of the heavy lifting and handles the day-to-day work in settling the claim.
– The insurer is obligated to defend “all four corners of the claim,” which means if there are covered and uncovered matters, the insurer cannot allocate defense costs, and must pay the whole tab. They can and will still allocate any indemnity payments.
Cons:
– The insured typically is not able to use their own counsel. They will most likely be forced to use the law firm the carrier chooses for them.
– The insured may have less control over the day to day progression of the claim.

Non-Duty to Defend
Pros:
– The insured gets to choose the counsel they want to use (subject to the insurer’s approval).
– The insured gets to control the process.
Cons:
– The Insurer will allocate defense costs between covered and uncovered matters.
– The insurer may be much tougher regarding what are reasonable attorney fees billed by the law firm.

Choice of Counsel – This is a related topic that comes up during the underwriting or claims process quite often. In many circumstances the insured may have a relationship with a law firm that they would want to use if there is a claim. Many insurance carriers have a panel of pre-approved firms they require be used. Some carriers are flexible about adding a new firm to their panel, or making an ex­ception for a particular account or claim, but most are not. This is an issue that should be brought up during the underwriting process, not at the time of the first claim. In many circumstances, the ability for the insured to use their counsel of choice will depend on the size of the account, the nature of services, the venue, whether that firm is already on the carrier’s panel counsel, and whether the policy is written on a duty to defend basis or not (see above).

Based on the pros and cons above, it can be most beneficial for the insured to be flexible with regards to choice of counsel in order to get a better form. In many cases, the insured is willing to compromise on terms and conditions to be able to use their own firm. Again, these discussions should be had dur­ing the underwriting process to avoid surprises and disagreements when a claim does arise.

Hammer Clause – This is another related defense coverage issue in most policy forms. There is actu­ally no section of the policy labeled the “hammer clause”—the expression is vernacular- it refers to an image of the insurer holding a metaphorical hammer with which to “hit” the insured; the “hammer” clause refers to a paragraph or clause which talks about what happens (usually in a duty to defend form) when a settlement opportunity has been reached with a plaintiff, but the insured refuses to settle. The insurer cannot settle without the insureds consent, BUT the “hammer” clause states that if the insured does not agree to the settlement, then the insurer is no longer obligated to pay any ad­ditional settlement or defense costs over the amount they could have settled the claim for.

Many carriers are willing to “soften” the hammer clause to “70/30” or “80/20” so that in the same scenario, the carrier would be obligated for 80% (or 70%)of any additional costs, and the insured would be obligated for 20% (or 30%), up to the policy limit, of course. In most circumstances, this has the same effect—which is to make the insured responsible for at least a portion of future expenses, and therefore “hammers” them into agreeing to the settlement. Some carriers will remove the hammer clause completely, which may be the best option. In this case, the insurer would be obligated for the full amount of any settlement and will stand by the insured and continue to fight until the insured agrees.

That stated, we end this paper with a cautionary reminder that in general, when an insurer believes that settlement is the best option (as opposed to protracted litigation), the insurer will do whatever it can to compel rapid settlement— whether or not the insured completely agrees. As always, should you have any questions, please get in touch with your Socius representative.

Business Challenges of a Hardening Market

In an effort to keep our business partners informed, we at Socius would like to educate our partners on some challenging trends we are seeing in relation to the hardening Management Liability (ML) marketplace in California.

As always, if you have any questions or concerns, don’t hesitate to reach out.

Increased Notice of Non-Renewals. Nearly all of the ML carriers offering coverage on an admitted basis are sending conditional non-renewal notices, as required by the DOI, as they may make major changes upon renewal. We are also seeing carriers actually non-renewing some accounts due to industry, losses, and/or location.

Carriers Are Saying No. Carriers will walk away from renewals if they cannot get the terms/condition that they want. There is not as much room to negotiate quoted terms as in previous years.

Going to Voicemail. It is harder to get in contact with underwriters and obtain quotes. Due to the hardening ML market, more marketing of renewals by brokers is happening to justify the increased premiums, retentions, etc. resulting in underwriters being inundated with new business submissions. Incumbent underwriters are not releasing renewal terms until closer to the renewal dates and non-incumbent carriers are hesitant to quote new business unless they feel there is a good chance they will write the account.

Nothing is Easy. Extensions are not easy. While they were simple requests in the past, including policy period extensions, increased limits, and other changes now need to be negotiated rather than just simply requested.

The Waiting Room. Underwriters are asking more questions before offering indications/quotes. Even on renewals, incumbent carriers are asking more questions as line underwriters are being asked more questions by their managers. More accounts need to be reviewed by underwriting managers, which leads to longer waiting times to receive quotes.

It’s All in the Details. Carriers will not bind without (some) subjectivities. Carriers are becoming more strict in having subjectivities submitted prior to binding. Sometimes we can negotiate binding subject to some subjectivities, sometimes we can’t.

Every Account is Unique. It’s becoming more difficult to compare apples to apples. Due to the hardening ML marketplace, carriers are not quoting similar terms on the same account. Different carriers may quote different retentions, different premiums and/or different coverage (ie: no wage and hour coverage, different hammer clauses, etc) making it difficult to compare options.

Lower Commission Levels. We expect this to happen as the hardening cycle progresses.

Going Non-Admitted. Some carriers are moving from admitted to non-admitted paper on renewal to give them the flexibility to make any changes they want to premium, retentions and coverage outside of DOI requirements for admitted carriers.

Losses: It’s All in the Details. More carriers are asking for current carrier loss runs prior to quoting. Unfortunately, due to privacy laws, carriers’ loss runs have fewer and fewer details of reported claims, making it difficult for underwriters to get a clear picture of the insured’s loss history. More and more we are being asked for the insured to provide claim narratives (typically on accounts with claim frequency and/or severity) because underwriters are not getting what they need from the carrier provided loss runs to determine the insured’s accurate loss history.

The Warning Light is On. We must prepare clients early and often. Our experience is that preparing clients early and often makes the delivering of these hardening market quotes easier.

Need More Help? Do you need more information to educate your clients? At Socius—we have plenty of articles and statistical info about D&O and EPL exposures and losses to help you explain the hardening management liability marketplace to your clients.

Please don’t hesitate to contact us with any questions. We invite you to like us on Facebook, follow us on Twitter, and connect with us on LinkedIn.

Paul Lefcourt
Management Liability Practice Leader
plefcourt@sociusinsurance.com

Hardening Management Liability Market for Privately-Held and Non-Profit, California-Domiciled Companies

Fact or Fiction?

The past 24 months have seen several management liability insurance (“MLI”) carriers shift their underwriting appetite/guidelines for their privately-held and non-profit 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 certain insureds, typically based upon industry or asset size of the risk

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 2 – 3 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 even for non-profit organizations
  • 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 privately-held and non-profit manage­ment liability insureds expect as a result of all of the above commentary? Our recommendation is to set expectations as follows:

  • Expect 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.
  • Expect 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:

1. Real estate accounts
2. Healthcare accounts
3. Restaurant / retail

While we are not yet ready to label the California MLI marketplace as “hard,” it certainly seems to be in transition, and that transition can be accurately described as “firming.” We’ll have to see how things develop during the coming months, but as mentioned above, we strongly recommend preparing your clients, as many will begin seeing changes to their MLI programs at renewal in the near term.

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.

                   

       

 

 

 

 

PaulLefcourt                                                                                                                                                                                                                                                                                                                                    Management Liability Practice Leader