Gallagher: medium-sized companies are key targets for D & O claims

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Gallagher: medium-sized companies are key targets for D & O claimsA hard market looms up for liability insurance for directors and managers (D & O). The back of 2018 saw a dramatic reorientation of acceptance discipline, when carriers continue to fight record numbers of class actions and an increasing number of events & # 39; based claims, caused by things like missed earnings, cyber-infringements and sexual harassment or discrimination in the workplace.

To address the current poor health of their books, many carriers will require higher R & D insurance premiums by 2019, according to Dr. Phil Norton, senior managing director, Insurance & Risk Management (North America), Gallagher. Norton recently published a white paper on the market conditions in 2019, entitled: & # 39; Harder market for D & O arrives while most trends cause concern & # 39 ;. In the report, the expert in management liability outlines a number of key issues that brokers should be aware of when they cross the paved market in 2019.

"D & O claim trends remain unaffected by insurance companies, the number of claims is increasing and there is a backlog of claims uncertain," Norton said. Insurance business. "However, my analysis shows that, at least temporarily, claims no longer seem to cost, is it because easier claims are handled more quickly, or is it because there is a trend that the average claim size is leveling off?

"I seem to be alone in the camp of even making the suggestion that the claim might level out severity, but I continue that theory and with good reason, that is that we see more and more medium-sized companies being indicted than ever before The magnitude of a mistake or alleged error that a medium-sized company can make will be much smaller than that of a Fortune 500 company – in short, smaller alleged errors mean smaller settlements. "

Despite the potential leveling of the strictness in D & O claims, insurers remain concerned about the aggregate costs that rise alongside the frequency of claims. To counter that, they are shifting their focus from growing markets to growing profitability by raising rates, Norton explained. What that means for brokers is that they come under pressure to realize rate hikes of 5% to 15%, or that transporters let someone else take over the company.

"This will be the first year in a long time when my customers will see a rate increase unless we do something creative," Norton said. "By creatively, we can change the layers in their program, the size of the layers and the size of the retention or deductibility, in some cases it is wise to pay more money to ensure that you have a solid D & O program. have the right provider and the right structure. "

One of the most important market trends identified by Norton is that the D & O claims increase with moderate severity. He attributes this to the emergence of a new breed of prosecuting lawyers who concentrate on operational and event-based claims. According to Norton, the bar of this emerging claimant is "doing great damage" for medium-sized businesses because the associated defense costs are too high compared to historical levels.

"Event-driven claims are dramatically on the rise, triggering things like lost revenue, product-based issues and operating situations, as well as claims arising from cyber-breaches and sexual harassment or discrimination," Norton said. "If you roll back the clock 10 to 15 years ago, these statements were not so clear: a company may have caused an environmental problem, or had sexual harassment charges within its staff, but it did not automatically translate into a D & O claim . "

In the Whitepaper D & O Market Conditions 2019, Norton emphasized two event-based D & O claims relating to fires. The first was a claim filed against Arconic, the manufacturer of the upholstery panels used to refurbish the Grenfell Tower in London, which tragically went up in flames in June 2017, resulting in 72 deaths. The second claim that Norton emphasized was filed against Anadarko Petroleum Corporation after a fire on an oil tank battery on May 26, 2017, which led to the shutdown of approximately 3,000 vertical sources.

The report states: "With people who have been killed in both cases, liability issues are not unexpected, but D & O packages are historically unlikely, but not this time, and we attribute the change to the newer mix of claimants who have D & O. to test liability theories and also expect to be paid for their efforts. "

"The logic of the claiming lawyers is something along the line: the directors and officers should have had more security protocols to protect against fires," noted Norton. "In the Anadarko case, for example, the prosecuting attorneys can argue:" If you had not had that fire, you would not have had the damage done to the plant, you would not have had to close the wells, you would not have lost money and your share prices would have would not have gone down. "They are trying to set up this causal strategy and they are the likely champions of these claims, which can be more difficult to prove, but the new prosecuting lawyers are testing the waters all the time.

"It is important for real estate agents to understand this dynamic so that they can inform their customers about the changing market, which is something we definitely try to do with Gallagher, but when it comes to much of the market, I do not think they fully understand the big picture. . "