By Adrian Atilano and Larry Conrath
Litigation against company executives for infractions from employment practices liability to mismanagement continue to intensify. The lawsuits are getting more expensive to defend and they’re affecting more individual leaders and organizations.
Directors and officers seek to buck the trend by analyzing their company’s claims history and implementing effective, long-term controls. Simultaneously, underwriters are doing the same to determine if your business is a good risk. Here’s how this reality will affect executive liability in 2019:
- The #MeToo Movement’s Lingering Insurance Effects. Not only did #MeToo allegations increase in 2018 - more than 12 percent according to the EEOC - but so did the cost of defending these claims. The EEOC recovered nearly $70 million for the victims of sexual harassment through litigation and administrative enforcement in 2018, up from $47.5 million in 2017. The result is a pressure for premium increases in Employment Practices Liability Insurance (EPLI) premium costs across most industries. In more litigious jurisdictions like California, this could be 15 to 20 percent and, on several occasions, even 100 percent premium cost increase for the entertainment sector. In 2019, underwriters will increase deductibles for businesses with a sexual harassment claims history and will scrutinize procedures, training, controls and compliance with associated state laws before quoting new policies. Underwriters will also begin reviewing board positions to assess how much diversity is represented at that level.
- Procure adequate D&O Protection for Your IPO and M&A. The 2018 Cyan Pharmaceuticals decision flipped the initial public offering (IPO) insurance market and led to insurance loss ratios as high as 140 percent. Public D&O policy retentions have doubled or tripled as a result with organizations finding themselves re-budgeting their expected premium payment. At the same time, mergers and acquisitions (M&A) are picking up, and companies that might have considered an IPO are using M&A as an exit strategy instead. The end result? In 2019, we’ll see more and more private companies are ramping up their D&O policies in anticipation of an impending M&A or eventual IPO. Both events involve extremely high levels of exposure to the personal assets of directors and officers.
- Social engineering and crypto currency continue to disrupt. According to the FBI, a 136% increase in social engineering scams over the last two-plus years led to more than $12 billion in business and individual losses. More sophisticated schemes - including criminals posing as the middle man in business transactions – together with low insurance limits have led to larger social engineering losses. [Social engineering is covered only as an extension to crime or cyber coverage.] This exposure will continue to grow into 2019. AI tools will have a greater impact on business operations and blockchain and crypto currency will become more commonly accepted in the coming year. The insurance market will be forced to consider covering exposures they haven’t seen yet.
- Global trade uncertainty continues. Heightened concern about tariffs and global regulatory exposure from NAFTA to the trade war with China will continue through 2019. Some businesses fear they’ll be strapped for cash, ultimately leading to company-wide layoffs, while others will be winners domestically. Should trade become disrupted with any of our foreign partners, staying out of bankruptcy and avoiding debt will be critical. Only time will tell.
2019 Growth and Beyond
What goes up must come down. It may be pessimistic, but today’s readily-available capital and sustained market growth will likely lead to a downward spiral at the end of the rainbow – whenever that may be. Directors and officers with a long-term view will begin preparing today for the above executive liability exposures both in 2019 and beyond.