Even before COVID-19, insurance for directors and officers (D&O) was experiencing a hard market.
Premiums had increased 44 percent in the first quarter of 2020. Over the past few years there has been a steady increase in the number of lawsuits and the size of jury awards in cases involving D&O. And now with the coronavirus in full swing, triple digit increases are expected, according to a new report by insurance industry analysts at A.M. Best.
Long Tail Problems
“It’s likely that the COVID-19 pandemic will ultimately lead to greater complexity regarding emerging D&O claims and litigation issues,” said David Blades, associate director, industry research and analytics at A.M. Best. “The inherent complexities of unique COVID-19 claim scenarios could lead to protracted litigation for many claims. … What that’ll do is it’ll cause the 2020 claims, and particularly 2020 D&O claims, to have an extraordinarily long tail. So that’s something that we’re looking at as things go forward,” he said.
Almost all D&O policies these days are written on a claims-made basis. This means coverage must be in effect at the time the claim is brought in order to be covered. For example, even if you carried it in 2019, a claim brought against your firm in 2020 would not be covered, unless you had continued your policy into 2020 — or purchased “tail coverage.” That’s the significance of long tail claims — because they may not come to light until several years down the road. The practice of writing insurance policies on a claims-made basis, common to most professional liability coverages like D&O, is contrary to the “occurrence” policies provided by most insurance companies for business liability insurance. With “occurrence” coverage, the policy covers the loss when it occurred, not when the claim is brought.
A.M. Best sees a long tail claim problem particularly with respect to COVID-19 because it may take years before the courts adjudicate claims where D&O coverage may be deemed to apply, such as to whether employers took proper precautions to prevent or alert employees and the public of COVID-19 related contamination and whether government funds made available to businesses to use for COVID-19 related expenditures were properly used.
D&O Policies Likely to Cover COVID-19 Triggers
Although policy wording regarding coverage for COVD-19-related events is controversial with respect to business interruption coverage, A.M. Best analyst Sridhar Manyem, director of industry research and analytics, seemed to minimize the problem in the case of D&O policies:
“Standard D&O wording may not apply to specific risks associated with COVID-19, but will apply to traditional D&O perils, including those triggered by COVID-19 events… Such ‘silent COVID-19’ coverage may not expressly address pandemic perils but may still respond to them.”
Long Term Forecast
The full A.M. Best Report, “Accelerating Trends, Unprecedented Turmoil Could Lead to Seismic Change for D&O Industry,” foresees the upswing in D&O prices as reflected in these underlying conditions to continue for the next few years.
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