Commercial Insurance

Directors And Officers Liability Insurance

Directors and officers liability insurance (D&O) covers the directors and officers of a company for negligent acts or omissions and for misleading statements that result in lawsuits against the company. There are various forms of D&O coverage. Side A coverage provides D&O coverage for personal liability when directors and officers who are accused of wrongdoing are not indemnified by the firm. Side B coverage reimburses a corporation for its loss when it indemnifies its directors and officers. Side C provides coverage for claims made specifically against the company. Corporate reimbursement coverage indemnifies directors and officers of the organization. D&O policies may be broadened to include coverage for employment practices liability (EPL). EPL coverage may also be purchased as a stand-alone policy.

In 2018 the D&O liability insurance sector was impacted by lawsuits concerning data breaches and privacy issues and the #MeToo movement, according to the 2019 RIMS Benchmark Survey (latest data available) from the Risk and Insurance Management Society and Advisen. The coverage is key to ensuring that companies comply with legislation such as the Dodd-Frank Wall Street Reform Act and the Consumer Protection Act.

In 2018, 68 percent of corporations purchased D&O coverage, according to the 2019 RIMS Benchmark Survey, which recorded responses from 570 organizations. Information technology companies were the most likely to purchase D&O coverage in 2018, with 96 percent of respondents purchasing the coverage, followed by 83 percent of banks. Education and consumer staples companies followed with 82 percent and 79 percent, respectively, purchasing D&O coverage. Advisen reported that the number of new cases that may be covered by D&O coverage fell in 2017 compared with 2016. Total shareholder risks, an area that encompasses securities class actions, derivative shareholder suits and other suits brought by shareholders, has stayed at relatively constant levels over the four years ending in 2017. Advisen noted that in 2017 alone the number of new merger objection cases rose 28 percent from 2016 and another 27 percent in the first three quarters of 2018 from the same three quarters in 2017.

Types Of Directors And Officers Liability Claims By Ownership, 2011-2014 (1)

(1) Based on participants in the survey that reported one or more claims over the five-year period.

Source: JLT Specialty 2015 U.S. Directors and Officers Liability Survey.

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Terrorism Insurance/TRIA

In addition to the risk of natural disasters, the insurance industry faces the threat of terrorist attacks. Losses stemming from the destruction of the World Trade Center and other buildings by terrorists on September 11, 2001 totaled about $32.5 billion, including commercial liability and group life insurance claims -- not adjusted for inflation -- or $35.9 billion in 2005 dollars. About two thirds of these losses were paid for by reinsurers, companies that provide insurance for insurers.

Prior to September 11, insurers provided terrorism coverage to their commercial insurance customers essentially free of charge because the chance of property damage from terrorist acts was considered remote. After September 11, insurers began to reassess the risk. For a while terrorism coverage was scarce. Reinsurers were unwilling to reinsure policies in urban areas perceived to be vulnerable to attack. Primary insurers filed requests with their state insurance departments for permission to exclude terrorism coverage from their commercial policies.

Concerned about the limited availability of terrorism coverage in high risk areas and its impact on the economy, Congress passed the Terrorism Risk Insurance Act (TRIA). The Act provides a temporary program that, in the event of major terrorist attack, allows the insurance industry and federal government to share losses according to a specific formula. TRIA was signed into law on November 26, 2002.and renewed again for two years in December 2005.  Passage of TRIA enabled a market for terrorism insurance to begin to develop because the federal backstop effectively limits insurers’ losses, greatly simplifying the underwriting process. TRIA was extended for another seven years to 2014 in December 2007. The new law is known as the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) of 2007.

See Background on: Terrorism risk and insurance for further information 

Employment Practices Liability

Employment practices liability insurance provides protection for an employer against claims made by employees, former employees or potential employees. It covers discrimination (age, sex, race, disability, etc.), wrongful termination of employment, sexual harassment and other employment-related allegations and lawsuits.

Discrimination and wrongful employee dismissal or termination were the most frequently cited employment-related claims in the 2004 Tillinghast survey of more than 2,400 U.S. and Canadian corporations.

The chart below shows trends in jury awards in employment practices liability cases.

Trends In Employment Practices Liability, 2013-2019

 

Year Median (midpoint) award Probability range (1)
2013 $100,000 $15,707 - $251,623
2014 86,250 20,000 - 302,574
2015 83,000 17,839 - 347,498
2016 122,170 25,000 - 447,437
2017 126,000 25,000 - 550,000
2018 190,000 34,193 - 551,121
2019 209,191 58,083 - 636,500
Overall $120,000 $25,000 -$414,150

(1) The middle 50 percent of all awards arranged in ascending order in a sampling, 25 percent above and below the median award. The median represents the midpoint jury award. Half of the awards are above the median and half are below. This helps establish where awards tend to cluster.

Source: Reprinted with permission of Thomson Reuters, Employment Practice Liability: Jury Award Trends and Statistics, 2020 edition.

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Excess Casualty

Excess casualty insurance, also known as excess liability insurance, which provides protection from infrequent catastrophic accidents or occurrences, is similar to umbrella liability coverage, which also increases the liability protection provided by a company’s insurance policies.  The main difference between excess and umbrella policies is that umbrella policies cover all underlying liability policies, whereas excess casualty policies increase the limits of liability on one particular policy.  Both types of policies are designed to cover large, infrequent losses such as injuries caused by the collapse of a department store roof under the weight of a category 5 hurricane.

Each year the broker Marsh reviews the excess liability insurance-buying decisions of more than 4,000 organizations worldwide, including some 2,800 U.S. companies. The chart below indicates the percentage of U.S. firms experiencing a loss of $5 million or more. Those that experienced such a loss tended to purchase much higher limits of liability coverage.

U.S. Firms experiencing a loss of $5 million or more, 2004-2008 (1)

(Percent)

 

(1) Loss experience in the past 5 years.

Source: 2008 Limits of Liability Report, © Marsh Inc. 2008.

Other Specialty Lines

There are a wide variety of insurance policies that cover special risks not insured under the more common forms of commercial insurance. “The Insurance Marketplace,” a directory of specialty providers produced each year by Rough Notes, listed over 600 specialty coverages, ranging from acupuncture specialists liability to kidnap/ransom insurance to special events liability in its latest directory.

Top 25 U.S. Surplus Lines Groups By Direct Premiums Written, 2019

($000)

Rank Group Direct premiums written Percent of total
U.S. surplus lines market
  Lloyd's Market (1) $12,477,000 22.5%
1 American International Group 2,946,471 5.3
2 Markel Corporation Group 2,747,110 5.0
3 Berkshire Hathaway Ins. Group 2,341,442 4.2
4 W. R. Berkley Insurance Group 2,048,959 3.7
5 Nationwide Group 2,034,571 3.7
6 Fairfax Financial (USA) Group 1,764,026 3.2
7 Chubb INA Group 1,649,400 3.0
8 AXA U.S. Group 1,582,356 2.9
9 Liberty Mutual Insurance Companies 1,510,361 2.7
10 Alleghany Insurance Holdings Group 1,057,411 1.9
11 James River Group 949,659 1.7
12 Argo Group 948,881 1.7
13 Tokio Marine U.S. PC Group 895,637 1.6
14 Starr International Group 872,251 1.6
15 Sompo Holdings U.S. Group 858,741 1.5
16 Zurich Financial Services Group NA 813,298 1.5
17 QBE Americas Group 810,066 1.5
18 AXIS U.S. Operations 770,726 1.4
19 Hartford Insurance Group 729,707 1.3
20 Great American P&C Group 688,103 1.2
21 Swiss Reinsurance Group 676,036 1.2
22 CNA Insurance Companies 613,541 1.1
23 Everest Re U.S. Group 584,836 1.1
24 Arch Insurance Group 567,964 1.0
25 Aspen U.S. Insurance Group 544,148 1.0
  Total, top 25 $31,005,711 78.4%
  Total U.S. surplus lines market $55,484,985 100.0%

(1) Because Lloyd's Market company structure differs from traditional insurance companies, AM Best does not include it in the ranking in this chart.

Source: ©A.M.Best – used with permission.

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