Concern that pandemic-induced D&O claims will drive further market hardening

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D&O risk and insurance claims are set to rise in line with a likely jump in insolvencies as governments withdraw Covid-19-related financial support and relax temporary bankruptcy rules, potentially sparking even further hardening of the D&O market, warned expert speakers at Commercial Risk’s latest event.

Although they said the pandemic has yet to spark a big increase in D&O claims, the experts predicted this is likely to change going forward. Risk managers need to be aware of the new risk landscape and ensure their insurance cover is up to speed.

But this will not be easy, given the fact the D&O market is already extremely hard, with coverages thrown in during the long soft market now being removed. So, it is vitally important that all parties come together and revisit D&O wordings to ensure they are fit for purpose and more easily understood, said one of the panellists.

Speaking during the three-day virtual claims conference, Jorg Henne, managing director of German risk management association GVNW, said relaxed insolvency laws in Germany and other countries to help companies through the pandemic mean many firms, and their directors and officers, have been protected.

But the GVNW fears that as these rules are phased out, along with other government support, insolvencies and D&O risks are set to increase. This could drive even further hardening of the D&O market, warned Mr Henne at the event sponsored by AXA XL, Belfor, Clyde & Co, Crawford, Liberty Specialty Markets, QBE, Willis Towers Watson and Zurich.

“An umbrella that was put up to protect businesses will end and no one really knows what will happen to insolvencies after that. What we have seen in the past around Europe is insolvencies are always a topic for D&O insurers. This is one of the first things liquidators, especially in Germany, start to look at to get some money into the insolvent company. So it could be that we see an increase in D&O claims, which would be a bit tragic because it is already, especially in Germany, a very hard market. Changes in the D&O market, especially in the 2021 renewal, were really significant. Not only in premium but getting capacities and changing wordings,” he said.

“So, if there is more pressure through increased claims it will be even tougher to renew D&O insurance during the upcoming renewal phase,” he added.

Noona Barlow, partner in financial lines at broker McGill and Partners, said there hasn’t yet been a dramatic increase in D&O claims as a result of the pandemic. But she too believes problems, particularly when it comes to insolvency, have been stored up.

“The issue, particularly with respect to insolvency claims that will probably form the bulk of [pandemic-related D&O] claims that we see, is a lot of the problems have just been hidden by the suspension of the wrongful trading legislation and government support in the form of furlough and those kinds of endeavours. As soon as those are removed and companies have to stand on their own two feet again, I think it is likely then that we will start to see a real influx of pandemic-related D&O claims,” said Ms Barlow.

Fellow speaker Laura Cooke, a partner at Clyde & Co, said insolvencies have long been an exposure for directors and officers, and agreed the risk is likely to increase once government schemes to reduce bankruptcies during the pandemic end.

“While the economic impact of the pandemic has already led to some corporate insolvencies, it is generally thought that the financial support programmes that have been put in place by various governments around the world are currently masking the impact of the pandemic on companies. It is anticipated that as these programmes wind down, we may well see a significant uptick in insolvencies,” said the lawyer.

She explained that the pandemic will create further additional D&O exposures and claims down the line.

These include regulatory exposures, with governments, for example, looking at whether companies have used money handed out to support business through Covid-19 in the right way.

There will also be health and safety exposures related to working conditions and measures put in place to protect employees, said Ms Cooke. Another area to watch out for is cyber and data risk, with increased fraud and remote working vulnerabilities big threats, added the lawyer. Directors and officers could come under pressure for a lack of oversight to tackle these issues, she said.

Covid-19-fuelled class actions in the US and other countries may also increase D&O risk and claims. “The markets generally have been relatively buoyant during this period despite significant otherwise economic impact of the pandemic… so we will have to see if we are going to see further uptick in US [class actions] or in other regions with matured, or maturing, class action regimes. But I think what is clear is company disclosures will be monitored closely by the plaintiff bar, investors and regulators,” said Ms Cooke.

Adding: “While it is of course likely that the vast majority of directors tried their absolute best in these unique circumstances, it may well be that things haven’t gone quite right and we may see issues arising in some of these areas in due course.”

Ms Barlow said the D&O market was already extremely tough for buyers even before Covid-19. Layering the pandemic on top could drive further hardening and see it spread to a wider range of industries, such as aviation and retail that have been hit hard during the crisis, she said.

Ms Barlow said it is therefore important to revisit D&O wordings to ensure they are more relevant for the period ahead. Part of this requires more simple policies that can be easily understood, she added.

“This is a really critical aspect of what we should be doing, looking forward. During the soft market we saw all kinds of freebies being added as the coverage got broader and broader. During the hardening of the market we are now seeing some of those freebies being restricted and, in some cases, sub-limits for bribery and corruption, or even exclusions. Perhaps what we need more generally is clearer and more transparent coverage that is useable and worthwhile to the end user, i.e. the directors and officers,” said the insurance and legal expert.

“We saw a recent D&O policy that had 65 endorsements on it, sometimes just changing a section of the policy by one or two words… imagine how hard that is going to be for a director or officer to understand. As scrutiny on directors and officers increases, and they are held to account more and more, particularly as we see regulatory changes coming in, it’s important they understand what the coverage is. In order to do that, they need to be able to read the policy and digest it quickly. So, changes to wordings are a very important aspect of what we need to do going forward,” added Ms Barlow.

Clive Thompson, past deputy chair of the Institute of Risk Management, which supported the event, said D&O risk and insurance cover is “probably the most bewildering” area for risk managers.

He advised risk managers to look into investigative cover and services that are on offer from the insurance market. He also said risk managers should increase interaction with the board about the coverage they have.

“It is vitally important that risk managers understand the investigative services and cover that can be provided by D&O insurance, to get quick access to funding and expertise when needed,” said Mr Thompson.

He also said regulators will look at how companies are managing D&O risk if and when they come knocking. So, high standards and qualified risk management professionals are vital.

“Companies need to show the quality of what they are doing and I think this will became more and more important in light of the pandemic,” said Mr Thompson.

Video recordings of all the sessions from Commercial Risk’s ‘Claims Management: Adapting to new long-term risks trends’ can be viewed at

*Commercial Risk is hosting a Captives Management Conference on 10-12 May 2021. Drawing on the expertise of senior risk managers from across Europe, this conference will consider the key issues and also provide education and practical advice for those moving towards a captive option for the first time.  It will also provide an opportunity for those who already have a captive to learn more about maximising their programmes. Make sure you register NOW for your free place