Insurance Market Conditions – Q1, 2014

ins-chartFollowing hardening market conditions in 2013 where the majority of insurers dealt premium increases, higher retentions and many times more restrictive terms and conditions, private companies purchasing Management Liability Insurance (a collective policy that includes Directors & Officers Liability (D&O) and Employment Practices Liability (EPL) coverages) don’t appear to be catching a break as we move into 2014.

A combination of economic conditions and increase in litigation continue to drive this hardened market.   Many insurers are weary of companies with financial hurdles that are unable to raise additional capital.  Companies who do not receive additional rounds of financing have proven to be a source of very poor loss performance, leading a couple of insurers to stop accepting submissions for venture-backed risks.

From a litigation perspective, many private companies don’t think they have the same likelihood to be involved in costly litigation as publicly traded companies, but statistics from Towers Watson point to a very different conclusion.   In the past ten years, 27% of private companies have been embroiled in litigation compared to 33% of public companies.  And litigation is expensive.  The average costs to settle and defend a claim approach $700,000.

What is Driving Litigation?

While claims come in all shapes and sizes, the scenarios below have netted frequency and severity:

  1. Merger/Acquisition related.  These can range from a “vanilla” disgruntled (and diluted) founder or shareholder, to a buyer’s allegation of fraud or breach of Representation or Warranty (note that D&O insurance is not meant to coverage a breach of rep claim but for more information on coverage available for Reps/Warranties, click HERE)
  2. Allegations including Breach of Fiduciary Duty, Unjust Enrichment, Tortious Interference and Antitrust Violations.  Claims fitting this bill range from investors stealing entrepreneurs’ ideas and starting their own companies in same sector, to  companies hiring away competitors’ employees (who then may take proprietary data themselves).
  3. Employment related.  Especially in CA.  The Equal Employment Opportunity Commission statistics show they tallied almost 100,000 charges in 2012.  The most common charge is retaliation (i.e. an employee fired after going to a supervisor to say they had been discriminated against).  But Wage and Hour claims, as well as claims related to the use of social media in an office environment, are also high on the list.

Litigation Drivers to Watch:

  1. Cyber Liability.  According to the Ponemon Institute, over 90% of companies have sustained a data breach, and 59% of those breaches were actually negligence based, not a result of some type of hacking incident.  Both first and third party Cyber Liability coverage is widely available in the market and any company that collects, stores or distributes private information should obtain options for this coverage.
  2. The JOBS Act.  With the benefits of ability to raise capital aside, private companies are at risk for greater regulatory scrutiny from both the affirmation of “reasonable steps” to verify accredited investor status and anti-fraud provisions in what they’re representing.  Coverage issues in private company D&O forms need to be watched as things unfold.
  3. Foreign Corrupt Practices.  This is already a hot topic for many companies.  As expansion continues for many companies overseas, careful attention needs to be paid to how business is conducted, even in the case of a small sales office and employees working on commission.

As the products and services of emerging growth companies launch and evolve, so do risks. Insurers continue to scrutinize financials in their underwriting, with significant focus on a company’s ability to sustain operations for a 12 to 18 month period.  But other concerns lie in their ability to decipher straight business risk.  Mergers, acquisitions, raising of capital, new investors, new products, and globalization are main focuses, just to name a few.

While the options for Management Liability insurance for private companies remain relatively abundant, the amount of information (and time) required to secure coverage terms, as well as the key insurers offering the coverage, is changing.  The key to positioning private company Management Liability renewals (or new applicants) is early preparation.  Pre-renewal discussions between insurance brokers, insurers and management of private businesses to review financials, business plan, investors, differentiators of the business, etc. is a necessity for many companies (especially technology, life science, social media and clean tech sectors).  Examining the insurer market place is also increasingly important.  Who is now offering the best coverage?  Who is committed for the long haul?

In today’s fast paced environment, business models don’t last as long as they used to.  We cycle through adjustment, re-adjustment, implementation and re-implementation.  D&O insurers fine-tune their offerings in these cycles.  The critical component to riding these changes is early preparation and working with a broker, like Mason & Mason, with a large footprint in the space to know all the variables.