'The COVID-19 pandemic is placing increased pressure on company directors and executives to communicate robust continuity plans that protect the interests of employees and shareholders, against a backdrop of uncertainty and rapidly evolving risk. In doing so, they will need to respond to a range of concerns — cash flow and liquidity, maintaining reputation, implementing employee safety frameworks — and ensuring the customer remains a top priority at all times.
Outside of the COVID-19 specific challenges, the insurance market was already experiencing structural change and a shifting capacity across management liability risk classes including directors and officers' liability (in particular Side-C provisions) and professional indemnity. For Side-C exposed risks, year-on-year premium increase is becoming the norm, with limits reduced to sub-$10 million for the majority of renewals, and some companies opting to self-insure.
While increased regulatory scrutiny and litigation funded class actions have partly dampened insurer appetite and led to material increases in premiums in recent years, in other spaces a steady increase in employment related claims and tax compliance investigations as part of a targeted industry review has further fuelled concerns.
Professional indemnity capacity has continued to tighten, particularly within specialist areas such as building certification for cladding related risks, and financial planners following the fall-out from the Royal Commission.
Given that directors and officers' liability and professional indemnity are ‘long tail’ insurance classes, costs continue to be incurred through adverse loss development on prior accident years, hurting insurers' profitability for the current financial year in many instances.
COVID-19 implications for directors and officers' insurance
In a worst case scenario potential insolvency and personal liability for directors remains a significant concern in client discussions, particularly for situations where directors may become personally liable for debts incurred by the company when it is unable to pay those debts as and when they become due (i.e. where the company is insolvent). Understanding how to mitigate those risks should be factored into business continuity plans as standard practice.
From a professional indemnity insurance perspective, it is often a precondition of entering into a contract with a customer that the firm (or practitioner) performing the professional service purchases a professional indemnity policy, often with a required minimum limit of liability specified as a term in the contract.
Business Insurance and Risk Market Update
This article was originally published in the Business Insurance and Risk Market Update May 2020.
In this update you will find additional insights on current market conditions and the effects of unprecedented impacts from extreme weather catastrophes, political and economic turbulence and the significant blow dealt to the recovery process dealt by the COVID-19 pandemic, including
- business continuity — what's your Plan B?
- cyber — risks evolving as fast technology itself
- food production — challenging times remain from farm to table
- claims — preparing for a new normal.
We strongly encourage any company director, executive or board with prevailing concerns around the adequacy of their insurance cover to speak with Gallagher subject matter experts at the earliest opportunity. We are here to help and, through our strategic partnerships and access to exclusive markets, we may be able to present an improved course of action for your business.