Insureds wary of ‘new’ risks that often lead to price increases and exclusions

No week seems to pass nowadays without news emerging of some national, European or global law that will potentially increase corporate risk exposure, not least in the liability arena and D&O in particular.

One example is the German Supply Chain Due Diligence Act, which will enter into force in January next year.

This Act’s goal is to bind companies operating in Germany to comply with due diligence obligations to ensure, or improve, compliance with human rights and environmental standards in supply chains.

German and other national rules of this type will be followed by an EC Directive on corporate sustainability due diligence.

The EC announced in February that this proposal aims to foster “sustainable and responsible” corporate behaviour throughout global value chains.

“Companies play a key role in building a sustainable economy and society. They will be required to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights, such as child labour and exploitation of workers, and on the environment, for example pollution and biodiversity loss,” stated the EC.

Expert lawyers say these laws will inevitably raise the liability exposure of German and European firms if they wittingly or unwittingly fail to comply.

Inevitably, brokers and insurers warn that directors and officers at firms affected by these laws will be exposed to personal liabilities for failing to spot and act upon abuses within their supply chains.

But as has been found with the European Environmental Liability Directive (ELD), for example, there is actually no firm evidence that such laws will lead to a higher exposure for firms in Germany and across Europe.

But as the GVNW committee members agreed during the German leg of Commercial Risk’s Risk Frontiers Europe survey, insurers will inevitably use the news of such rules and regulations to argue for further rate increases to account for a perceived increased risk.

“We all need to look at the supply chain – the brand of companies is based in the supply chain and insurers are looking at this,” said GVNW committee member Mathieas Kohl during the roundtable meeting.

Fellow GVNW committee member Dirk Förster added: “This is relatively new and we are aware of what is required and looking at what needs to be done to comply and meet the final requirements, but we do not expect big changes. We will also be asking about the approach of our insurers too.

“The German Supply Chain Act will be effective as of 1 January and I have a feeling that most companies are well prepared. We will be looking closely at the EU version, which could be a stronger interpretation,” said fellow GVNW committee member Patrick Fiedler. “It is also relevant for insurers but they currently tend to just seek exclusions rather than taking a positive direction and this is a concern,” he added.

GVNW president Alexander Mahnke fears that the coming supply chain due diligence rules will simply give insurers another excuse to seek higher prices for less cover and believes this has become a worrying trend.

“This is a good example of what is currently happening. Twenty years ago, directors would read of such initiatives and come to the insurance department and ask: what part of this new risk is insurable? Because of what has happened in the market in recent times, they don’t even come and ask anymore because everyone knows the market does not provide for major risks anymore,” he said.

“My fear is that the insurance market will just become less and less meaningful over time and corporates will need to take care of their own risks and find other ways of financing the risks,” added Mahnke.

Fellow GVNW committee member Christian Böhm agreed and is also frustrated by how the insurance market is using such ‘news’ as an excuse to pull back further.

“I find it very interesting that you read of such matters in the press and then they come up in discussions with insurers in the same way that social inflation etc is used as an excuse for higher premiums, especially for D&O. The idea is that ESG reporting risks, supply chain risks and the like will lead to a huge number of D&O claims, but I doubt this will happen,” said Böhm.

“The insurers seem to choose everything to say that they need more. Remember in the 1990s when the Environmental Liability Directive was being drafted and the insurers thought they would gain lots of new premiums for this? But at the end of the day, it did not really happen. It was the same with the Product Liability Directive that was supposed to lead to a huge number of new claims but it didn’t really change anything. For me, this is psychologically interesting. I would rather the insurers observe the development of the risk and properly rate it,” he added.

Pia Weiss commented: “This is similar to what happened with Covid-19 and the introduction of exclusions for infectious diseases. We want solutions but face broader exclusions than justified. The insurers are taking the opportunity to exclude too much.”