Buyers’ Market for D&O
Overall, pricing for directors and officers insurance programs are down, thanks to increased carrier competition for excess lines, according to brokerage firms. But rates are higher for some sectors such as health care and life science organizations.
According to the “Aon Financial Services Group D&O Pricing Index” for the fourth quarter of 2014, the average price for $1 million in limits for Aon clients increased 10.3 percent from the third quarter of 2014, due mainly to the change in the mix of business from one quarter to the next.
Comparing the current quarter with the prior year quarter, the average price fell 12.2 percent.
For those programs that renewed in both Q4 2014 and Q4 2013, pricing fell 7.4 percent.
“We are entering a buyers’ market, as pricing is starting to come down in totality for these D&O programs,” said Brian Wanat, chief executive officer of Aon’s financial services group in New York City.
“We are entering a buyers’ market, as pricing is starting to come down in totality for these D&O programs.” — Brian Wanat, chief executive officer, Aon’s financial services group
While pricing for primary D&O policies is relatively flat, increased competition within the excess market is lowering prices, resulting in a net reduction for overall programs, Wanat said. As carriers such as Allianz SE in Munich enter the excess market, it creates a better supply environment, lowering prices.
“D&O has been profitable with no real increase in claims frequency or severity,” he said. “In many instances, only the primary layer comes into play, given dismissal rates where defense costs are contained and paid by the primary layer of D&O only, with the excess unscathed.”
Moreover, reinsurance, which has even softer prices, has been “ample and a good proposition for insurance companies,” Wanat said.
For Arthur J. Gallagher & Co., smaller private clients in particular are paying firmer prices because most only purchase primary policies and not excess policies, said Phil Norton, president of the company’s professional liability division in Chicago.
They are also getting larger percentage increases because of their mix of covered claims, including entity claim allegations such as antitrust and deceptive trade practices, which are more expensive because they are the leading cause of the higher loss ratios.
On the other hand, many larger firms are getting an overall decrease when they add excess, particularly if they are in the right industry, such as manufacturing, Norton said.
“Most manufacturers don’t have any unique risks and they tend to flow with the economy,” he said. “They don’t even have to be making extraordinary profit to be considered a very good risk – they just need to be stable.”
“When things are high, they can fall farther and if there are big stock drops, companies can pretty much count on getting D&O claims.” — Rob Yellen, executive vice president, FINEX North America, Willis
Overall, AJG’s private clients saw an 8 percent to 10 percent price increase in 2014, which has relaxed to 5 to 8 percent increases in 2015 to date, Norton said.
Brenda Shelly, Marsh’s U.S. D&O product leader in New York City, said that, while excess rates for Marsh’s public company D&O polices have been declining since their peak in the fourth quarter of 2012, primary ABC rates are firming.
However, since lower excess prices offset primary market increases, companies with good risk profiles were still able to achieve overall program decreases each year, she said.
“In the private and nonprofit spaces, we continue to see rate and retention pressure, which we expect to continue for the next few quarters due to very broad coverage and historical low rates at the same time they were experiencing serious claims for the past few years,” Shelly said.
Jeffrey R. Lattmann, executive managing director, executive liability at Beecher Carlson in New York City, said that the clients that have had flat pricing on primary have had consistently well-managed, good financials, while the clients that have seen increased premiums have had material changes in risk, adverse development in their financials and claims paid.
Smaller companies, which have employment practices liability built into their D&O policies, are facing headwinds if they operate in California, Lattmann said. “If they have any employees in California, they are experiencing higher pricing and higher retentions, as it’s the toughest state to underwrite with all of the employment litigation.”
According to Willis data, public companies have seen less upward pressure on rates, although rate increases are likely for health care companies, homeowner/condominium associations, educational institutions and nonprofit entities.
For financial institutions, Willis is seeing small decreases on primary coverage, with slightly greater savings on excess. For companies that have yet to see relief from credit crisis increases, particularly financial guarantee companies, rate decreases could be as large as 25 percent.
“In the end, I don’t think the financial crisis was as scary from a D&O insurer perspective as many expected,” said Rob Yellen, executive vice president, FINEX North America, Willis in New York City. “While we’re still seeing bankers get sued when their banks failed, the amount of claims were not nearly as bad as many thought they were going to be.”
Looking forward, Yellen said, the D&O market is “at a crossroads.”
“We’ve had a relatively stable slow-growth economy and now have a pretty high stock market at or near 52-week highs,” he said. “When things are high, they can fall farther and if there are big stock drops, companies can pretty much count on getting D&O claims.”
Those companies are also facing challenges as the Federal Reserve appears ready to raise rates at any time, and a strong dollar is making it harder for U.S. companies to make money outside the U.S., Yellen said.
Moreover, the SEC is now focused again on accounting fraud, which typically hits D&O harder than insider trading.
“So while clients may see a bit of price relief this year due to competition, D&O exposure seems to be getting worse,” he said.
Insurer Has Duty to Defend Marker Maker
On April 25, 2012, Too Market Products Inc. filed suit against Creation Supply Inc. in U.S. District Court in Oregon.
In its lawsuit, Too Market alleged trademark infringement, violation of trade dress (the image or appearance of the product), and unfair competition against Creation Supply, when it imported and sold a competing line of markers in a similar shape. Too Market sought a permanent nationwide injunction against the sale of Creation Supply’s markers.
Creation Supply sought a defense from Selective Insurance Co. of the Southeast, which had issued it a business owners’ policy on Aug. 19, 2011. The policy excluded personal and advertising injury “arising out of infringement of copyright, patent, trademark, trade secret or other intellectual property rights.”
The exclusion related to the “use of another’s advertising idea in your ‘advertisement.’ ” But it did not apply to infringement “in your ‘advertisement,’ of copyright, trade dress or slogan.”
The U.S. District Court ruled Selective had a duty to defend, while denying allegations of breach of contract and bad faith. The insurer appealed the case to the Appellate Court of Illinois, First Judicial District. A Feb. 9 ruling upheld the lower court decision.
The appeals court ruled that retail store displays of that type of marker, in which the “shape and design of the marker is prominently displayed” constituted an advertisement under the policy.
Scorecard: Selective must defend Creation Supply in a trademark infringement case.
Takeaway: While the court ruled the in-store display was an advertisement, the opinion warned that its conclusion “does not mean that all retail product displays constitute advertising activity … .”
Claims Following Explosion Are Denied
On Dec. 7, 2009, a large pressure chamber used to grow synthetic quartz crystal exploded, throwing a four-ton fragment hundreds of feet. Other flying debris killed a man walking to his truck one-quarter mile away.
The owners of the pressure chamber, NDK America and NDK Crystal Inc. knew there were some concerns with its pressure chambers, which displayed some signs of cracking and future cracking when the contents were under pressure of 29,000 pounds per square inch.
Two years earlier, when NDK was in litigation with EPSI, the designer and manufacturer of the pressure chamber, EPSI and one of NDK’s experts warned against continued operation of the pressure chambers without performing inspections. As part of that litigation, NDK alleged that the pressure chambers, known as autoclaves, were “were defectively or negligently manufactured and showed signs of cracking and leaking.”
That case settled a few months prior to the 2009 explosion. After the explosion, Nipponkoa Insurance Co., Ltd., which had issued an “all risk” property insurance policy to NDK, filed suit, seeking a declaratory judgment that the policy did not cover the insured’s property or business interruption losses because it had been warned about the possibility of an explosion but continued to use the autoclaves anyway.
Thus, it argued, the explosion was not “fortuitous,” and that the autoclaves were not damaged by the explosion because they were valueless.
NDK argued that defects and cracking were not the cause of the explosion, and that its insurer acted with bad faith and breached its insurance contract.
The U.S. District Court for the Northern District of Illinois ruled that the explosion, while possible, was not inevitable and thus was a “fortuitous” event. However, the court also ruled that the autoclaves were “inherently dangerous and defective,” and that NDK provided no evidence that the machinery had any “actual cash value” other than as scrap metal.
In fact, it noted that the company argued in the earlier litigation against EPSI that the autoclaves were “unreasonably dangerous and defective … and were in need of replacement.”
The court also ruled that business interruption losses were not covered because the expected profits submitted by NDK were “an ‘expected’ or target goal, and not an actual projection of profits.”
Scorecard: Nipponkoa did not have to pay nearly $10 million for the autoclaves or for any business interruption losses.
Takeaway: As long as the explosion was merely a risk, even if a heightened risk, it was an insurable event.
Claims-Made Reporting Requirement Upheld
On Dec. 23, 2009, attorney Thomas Aul was notified by clients Melissa and Kenneth Anderson that they were “dissatisfied” with the legal representation he offered in the Andersons’ purchase of a commercial property in Delafield, Wis.
In a letter to Aul, the Anderson’s new attorney informed Aul that the terms of the transaction were “unfair and unreasonable,” that Aul had a conflict of interest in the matter, and that the transaction violated “the rules of attorney professional responsibility.” It sought payment of $117,125.
Although Aul had a claims-made-and-reported policy with Wisconsin Lawyers Mutual Insurance Co. (WILMIC) at that time, he did not report the claim until March 2011, nearly a year after the policy expired on April 1, 2010.
In March 2012, the Andersons filed suit against Aul and several real estate and investment companies owned by Aul, alleging breach of fiduciary duty, legal malpractice (negligence), breach of contract and misrepresentation contrary to Wisconsin state law.
In addition to compensatory damages, the lawsuit also sought punitive damages for “malicious” conduct and “intentional disregard of [their] rights.”
In May 2012, WILMIC intervened in the lawsuit, and defended Aul under a reservation of rights. It sought and received a summary judgment, declaring that the policy did not provide coverage for the claim.
An appeals court reversed that decision, determining that Wisconsin’s “notice-prejudice statutes” superseded the policy’s notice requirement. The notice-prejudice statutes state that an insured’s failure to furnish timely notice of a claim will not bar coverage unless timely notice was “reasonably possible” and the insurer was “prejudiced” by the delay.
A four-judge panel on the Supreme Court of Wisconsin reversed the case again, ruling that the policy’s requirements should be upheld.
“We conclude that the legislature did not intend to .. make the strict reporting requirement underlying claims-made-and-reported policies unenforceable in this state,” the panel ruled on Feb. 25.
Scorecard: The insurance company was not required to indemnify its insured following claims of legal malpractice, breach of fiduciary duty and other allegations.
Takeaway: A ruling upholding the claim would have converted all claims-made-and-reported policies into pure claims-made policies or occurrence policies.
Healthcare: The Hardest Job in Risk Management
Radically changing cost and reimbursement models.
Rapidly evolving service delivery approaches.
It is difficult to imagine an industry more complex and uncertain than healthcare. Providers are being forced to lower costs and improve efficiencies on a scale that is almost beyond imagination. At the same time, quality of care must remain high.
After all, this is more than just a business.
The pressure on risk managers, brokers and CFOs is intense. If navigating these challenges wasn’t stress inducing enough, these professionals also need to ensure continued profitability.
“Healthcare companies don’t hide the fact that they’re looking to reduce costs and improve efficiencies in practically every facet of their business. Insurance purchasing and financing are high on that list,” said Leo Carroll, who heads the healthcare professional liability underwriting unit for Berkshire Hathaway Specialty Insurance.
But it’s about a lot more than just price. The complexity of the healthcare system and unique footprint of each provider requires customized solutions that can reduce risk, minimize losses and improve efficiencies.
“Each provider is faced with a different set of challenges. Therefore, our approach is to carefully listen to the needs of each client and respond with a creative proposal that often requires great flexibility on the part of our team,” explained Carroll.
Creativity? Flexibility? Those are not terms often used to describe an insurance carrier. But BHSI Healthcare is a new type of insurer.
The Foundation: Financial Strength
Berkshire Hathaway is synonymous with financial strength. Leveraging the company’s well-capitalized balance sheet provides BHSI with unmatched capabilities to take on substantial risks in a sustainable way.
For one, BHSI is the highest rated paper available to healthcare providers. Given the severity of risks faced by the industry, this is a very important attribute.
But BHSI operationalizes its balance sheet in many ways beyond just strong financial ratings.
For example, BHSI has never relied on reinsurance. Without the need to manage those relationships, BHSI is able to eliminate a significant amount of overhead. The result is an industry leading expense ratio and the ability to pass on savings to clients.
“The impact of operationalizing our balance sheet is remarkable. We don’t impose our business needs on our clients. Our financial strength provides us the freedom to genuinely listen to our clients and propose unique, creative solutions,” Carroll said.
Keeping Things Simple
Healthcare professional liability policy language is often bloated and difficult to decipher. Insurers are attempting to tackle complex, evolving issues and account for a broad range of scenarios and contingencies. The result often confuses and contradicts.
Carroll said BHSI strives to be as simple and straightforward as possible with policy language across all lines of business. It comes down to making it easy and transparent to do business with BHSI.
“Our goal is to be as straightforward as we can and at the same time provide coverage that’s meaningful and addresses the exposures our customers need addressed,” Carroll said.
Claims: More Than an After Thought
Complex litigation is an unfortunate fact of life for large healthcare customers. Carroll, who began his insurance career in medical claims management, understands how important complex claims management is to the BHSI value proposition.
In fact, “claims management is so critical to customers, that BHSI Claims contributes to all aspects of its operations – from product development through risk analysis, servicing and claims resolution,” said Robert Romeo, head of Healthcare and Casualty Claims.
And as part of the focus on building long-term relationships, BHSI has made it a priority to introduce customers to the claims team as early as possible and before a claim is made on a policy.
“Being so closely aligned automatically delivers efficiency and simplicity in the way we work,” explained Carroll. “We have a common understanding of our forms, endorsements and coverage, so there is less opportunity for disagreement or misunderstanding between what our underwriters wrote and how our claims professionals interpret it.”
Responding To Ebola: Creativity + Flexibility
The recent Ebola outbreak provided a prime example of BHSI Healthcare’s customer-centric approach in action.
Almost immediately, many healthcare systems recognized the need to improve their infectious disease management protocols. The urgency intensified after several nurses who treated Ebola patients were themselves infected.
BHSI Healthcare was uniquely positioned to rapidly respond. Carroll and his team approached several of their clients who were widely recognized as the leading infectious disease management institutions. With the help of these institutions, BHSI was able to compile tools, checklists, libraries and other materials.
These best practices were immediately made available to all BHSI Healthcare clients who leveraged the information to improve their operations.
At the same time, healthcare providers were at risk of multiple exposures associated with the evolving Ebola situation. Carroll and his Healthcare team worked with clients from a professional liability and general liability perspective. Concurrently, other BHSI groups worked with the same clients on offerings for business interruption, disinfection and cleaning costs.
Ever vigilant, the BHSI chief underwriting officer, David Fields, created a point of central command to monitor the situation, field client requests and execute the company’s response. The results were highly customized packages designed specifically for several clients. On some programs, net limits exceeded $100 million and covered many exposures underwritten by multiple BHSI groups.
“At the height of the outbreak, there was a lot of fear and panic in the healthcare industry. Our team responded not by pulling back but by leaning in. We demonstrated that we are risk seekers and as an organization we can deploy our substantial resources in times of crisis. The results were creative solutions and very substantial coverage options for our clients,” said Carroll.
It turns out that creativity and flexibly requires both significant financial resources and passionate professionals. That is why no other insurer can match Berkshire Hathaway Specialty Insurance.
To learn more about BHSI Healthcare, please visit www.bhspecialty.com.
Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, and homeowners insurance. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has regional underwriting offices in Atlanta, Boston, Chicago, Los Angeles, New York, San Francisco, Toronto, Hong Kong, Singapore and New Zealand. For more information, contact email@example.com.
The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include all policy terms, conditions and exclusions. Please refer to the actual policy for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.