Driving the increases is the rise in shareholder litigation, both in the number of cases and size of jury awards and settlements, brokers said. Another connected factor is the growth of litigation-finance firms, which invest in corporate legal disputes.
In the U.S., premium rates for directors-and-officers insurance jumped 44% to 104% in the first quarter compared with the year-earlier period, based on different indexes of corporations that are published by brokerage firms at AON PLC and Marsh & McLennan Cos. The average increase for D&O insurance in Australia was 225% for the first quarter of 2020, Marsh data shows.
To hold down the rising costs, some companies are raising their deductibles—the portion they pay before insurance kicks in—while others are reducing maximum payout amounts and setting up self-insurance arrangements.
The decision puts them on the hook for more of the expense of fighting lawsuits. It is an especially difficult decision as many lawyers are anticipating a wave of shareholder litigation tied to alleged shortcomings by managers and boards in regards to their handling of Covid-19 matters.
“It’s a real Catch-22…some of our clients say that, ‘If we didn’t take out a higher limit, we wouldn’t be a target for litigation funders,’” said Scott Curley, a director at GSA Insurance Brokers in Sydney.
So-called D&O insurance is one of the core products bought by publicly traded companies. It is designed to pay out when claims are filed against directors, officers and other employees, if the corporation doesn’t cover the costs. It also will reimburse the company when it pays claims on directors’ behalf, and covers a company’s liabilities when it is sued by shareholders.
The premium increases have been stiffest in the U.S. and Australia given they have legal systems in which lawsuits against companies are more common.
Australia’s largest grain handler, GrainCorp Ltd., is among the companies that has overhauled its insurance arrangements in the face of eye-popping rate rises. In February, its brokers quoted a 567% year-over-year increase.
“We did not accept those numbers because the price was crippling,” said Graham Bradley, who was chairman of GrainCorp at the time of the policy-renewal discussions. He is now chairman at United Malt Group Ltd. after its spinoff from GrainCorp in March.
The board made a “material reduction” in the total extent of the cover and raised deductibles across the two ASX-listed companies, he said.
The agribusiness paid 1 million Australian dollars (about $685,000) for its D&O insurance in 2018, before D&O prices began rising, and in 2019 the cost jumped to $1.03 million. This year, brokers said the price would jump to more than $6.86 million for a policy covering GrainCorp and United Malt.
The pain is being felt almost everywhere.
According to AON, no primary policies that renewed in the first quarter with the same limits and deductibles fetched a lower price. To contain the increases, nearly half of the clients changed their deductibles or policy limits, and sometimes both.
In a June 10 report, A.M. Best Co. said a spike in litigation caused by specific events, such as cyberattacks, the #MeToo movement and wildfires, was driving the increases. Companies also face potential litigation over “emerging exposures” such as Environmental, Social and Governance, or ESG, issues and climate change, it says.
A total of 428 new class-action securities cases were filed across U.S. state and federal courts in 2019, the highest number on record and nearly double the 1997-2018 average, according to Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse.
Some legal scholars and insurance executives say the increase traces partly to financiers who bankroll litigation. In May, an inquiry into Australia’s litigation-funding sector, which gives advances to plaintiffs and gains rights to a portion of any settlement or award, was referred to the Parliamentary Joint Committee on Corporations and Financial Services.
The first hearing will be held on July 13, and the committee has been asked to hand down a report by Dec. 7.
The trends are creating worry in C-suites throughout the U.S. and Australia.
Soubhagya Parija, chief risk officer of the quasigovernmental New York Power Authority and a board director at the Risk and Insurance Management Society in the U.S., said there is widespread concern among his colleagues “about the legal situation…and the pandemic has only made it worse.”
The power authority experienced only a 1% increase in its D&O program premiums in May from its industry mutual insurer, thanks to what Mr. Parija said are robust risk-mitigation efforts and a lack of history of litigation against the entity.
Mr. Parija is preparing for a 15%-to-20% increase upon the next renewal in 2021 because “what we achieved this year is not going to be achievable going forward.”
Altium Ltd., an ASX-listed software company headquartered in San Diego, has seen its D&O insurance premiums increase by a factor of 10 over the past five years, Chairman Sam Weiss said.
“In terms of the magnitude of the increase since that time, it has become a significant line item in our budget,” he said.
Still, Altium decided to keep the same level of insurance this year.
“We’re absolutely scrupulous about the rigor in which we manage our continuous disclosure obligations,” Mr. Weiss said. “So the more attention we pay to that, we believe, the lower the risk of class-action litigation.”
Some companies also are setting up captive insurance companies, often in Singapore or Bermuda, as wholly owned subsidiaries that provide insurance to the sponsoring company alone, brokers said.
In April, Tesla Inc. Chief Executive Elon Musk came up with another alternative: a personal guarantee. The California company decided not to renew insurance policies protecting its board of directors and officers from liability because of “disproportionately high premiums quoted by insurance companies.”
Instead, Mr. Musk personally agreed to cover the executives’ expenses.
Insurers also have tactics they are deploying: These firms are including more restrictions and exemptions written into contracts, especially related to Covid-19. The pandemic has complicated matters on several fronts.
It “has made the task of earnings forecasts and everyday operational planning next to impossible for directors and managers,” said Scott Atkins, who heads the risk-advisory practice in Australia of law firm Norton Rose Fulbright.
And, as employees return to workplaces, directors and executives must stay on top of guidance for protecting them, including monitoring proper desk space, physical distancing, meeting capacities, ventilation and sanitization, said Kaise Stephan, a Sydney-based partner at Deloitte.
“All those are areas of potential claims,” he said.