Public D&O market trends

The public directors and officers (D&O) market is experiencing a continual hardening of the market. Insurance buyers are confronting escalating rates, reduction in available limits, rising retentions, and additional policy exclusions. Rates in 2021 are expected to continue trending upward because of more class action lawsuits, increased claims frequency, higher defense costs, and unpredictable “mega” jury verdicts.

Public company risk exposure typically intensifies during periods of uncertainty surrounding perceived negative consequences that can impact a corporate entity’s various stakeholders. Financial market and stock price volatility can trigger class action lawsuits, derivative litigation and other claims against management and director accountability. Operating within the climate of a public health crisis has the potential to further exacerbate a public company’s exposure to a myriad class of allegations resulting from challenges in workforce, health and safety concerns, stress in the supply chain, product boycotts, breach of contracts and financial or solvency issues.   

“2020 was all about COVID,” as summarized in the Securities and Exchange Commission (SEC) Division of Enforcement’s annual report. During the period of mid-March to September 30, 2020, approximately 16,000 “tips and referrals” had been triaged, an increase of 71% over the comparable period in 2019. Of those, the SEC Division of Enforcement ultimately opened more than “150 pandemic-related inquiries or investigations and filed six enforcement actions related to COVID.”  Yet overall, SEC enforcement against public companies hit a 6-year low in fiscal year 2020, ending September 30, reflecting a significant slowdown in new filings during the early months of the pandemic,” as reported by Law360.

New York University’s Pollack Center for Law and Business in collaboration with Cornerstone Research, Inc., released their annual report of public company filings and settlement values in November 2020; revealing that the SEC filed fewer new enforcement actions against public companies and subsidiaries in FY 2020. New filings totaled 61 as compared to the record high of 95 actions in FY 2019, making 2020 the lowest number of new actions since 2014. Issuer reporting, potential accounting irregularities and disclosure violations of quarterly financial results led the allegations for 30 actions; the most filed in any fiscal year to date. Citing the implications of COVID, 18 of the new actions this year were filed in the last two months of the fiscal year. 

The value of public company settlements continues to climb, despite a halt in court activity during COVID shutdowns. According to the report, the SEC reportedly imposed $1.6 billion in monetary settlements on defendants in public company and subsidiary actions in FY 2020, compared with the previous fiscal year total of $1.5 billion. Social inflation is attributed with contributing to this upward value trend. Social inflation reflects the rising cost of insurance claims caused by social and economic trends that result in increased litigation and large jury ’nuclear’ verdict awards. Such mega-verdicts make it systematically difficult for insurers to predict the cost of claims in today’s socio-political environment with juries more focused on holding corporations accountable for alleged wrongdoing.

Market observers in the D&O insurance sector believe the uptick in litigation funding, a relatively new phenomena in the U.S., is directly aligned with the current social inflation paradigm. Litigation funding is, in essence, third party funding by sources providing capital to plaintiffs without the financial resources to pursue a lawsuit needed to litigate or arbitrate a claim. Funds are then repaid to the funding source with an agreed upon payment or “cut” after any eventual recovery.

Disciplined underwriting of D&O coverage has become the driving force behind policy renewals and will continue to be going into the new year. Rates will continue to rise, which will attract new capital to the professional liability sector thus presenting competitive challenges. Yet the ominous cloud of the pandemic stretching well into 2021 will continue to place pressure on corporate entities to be mindful of the underlying interests of key stakeholders to avoid heightened exposure to potential liability risk.