Hope to ease D&O insurance rates?

The effect of COVID-19 on this already costly class appears that it will get worse before it improves.

During April and May of 2020, we have observed increased rates being applied to publicly traded and private companies on their directors’ and officers’ liability policies (“D&O”). Some companies are being refused renewal or are being confronted with narrower cover. Most are experiencing premium increases, in circumstances up to 100% of their expiring premium and excess’.

Reforms by the Morrison Government to regulations for litigation funders, a Parliamentary Inquiry into class actions, easing disclosure obligations for publicly traded companies and the Federal Court’s decision in Myer, should yield some relief for insurers.

But when will Policyholders obtain the benefit of these reforms?

In our article of 9 April 2020 Directors’ and officers’ and company liability – risks and insurance issues from COVID-19 (accessible here) we foreshadowed that COVID-19 was causing concerns for insurers underwriting this class of business. We wrote expressly:
Companies and their directors may be exposed to claims for a range of allegations for mismanagement of the company during the pandemic. Companies and their directors must take appropriate steps to respond to the impact of COVID-19.
Prior to the pandemic, the D&O insurance market was being significantly affected from losses from class action law suits in addition to losses from the Banking Royal Commission. Cover for claims made against the company, by shareholders alleging they had suffered loss in the course of trading the company’s securities (“Side C”), was cost prohibitive enough – if attainable at all – it is now worse.

On 30 October 2019, The Australian quoted Bellrock that spikes in premiums across the class were linked to losses and uncertainty of shareholder class actions. The article may be accessed here.

Forty-five percent of all class actions commenced in the past 20 years have been notified from 2016 onwards, many remain unresolved. For the year 2016 year, D&O gross written premium was $250m and claims are reserved at $400m. Current data suggests that for the periods 2016 to 2018 claim reserves are estimated at over $1.8 billion – the annual D&O market is said to now (2020) be approximately $650m in premium.
COVID-19 impact on insurance market – Lloyd’s of London

The impact on the market has been confirmed (albeit on a global perspective and across all general insurance product lines) by Mr John Neal, CEO of Lloyd’s of London.

It is reported that losses are presently forecasted between $3bn-$4.3bn and if the current lockdown continues that could increase significantly. Neal estimated that 2020 industry losses could be as high as $107bn and described them as “on par with some of the biggest major claims years for the industry”.

Appetite in London market for D&O and Side C for Australian companies is minimal. Many markets have withdrawn and are highly reluctant to write and new business, leaving the local Australian market to “fend for itself” across the troubled class.

Morrison Government reforms and the Myer Class Action
Returning to D&O and Side C cover, the positive news is that the Australian Federal Treasurer, Josh Frydenberg, has taken some steps over the course of the last few weeks to move to crack down on class-action funders and shield boards from class action lawsuits. This ought to return some confidence to D&O insurers.

ASIC Regulation

It is proposed that litigation funders will now come under the scrutiny of the Australian Securities & Investment Commission (ASIC) and that they will be required to comply with Australia’s managed investment scheme rules. In doing so, funders will be required to operate with greater transparency under strict regulation.

Easing of continuous disclosure obligations

In a further positive move to protect directors and publicly traded companies - particularly from heightened risk of litigation resultant of COVID 19 - Mr Frydenberg on 25 May 2020, announced that continuous disclosure laws would be ‘relaxed’.

It is proposed that company directors would only have liability for breaching those laws if any failure to disclose market sensitive information was resultant of actual knowledge held and ought to be disclosed to investors, and/or, failure to disclose the information was negligent or reckless.

The initiative serves to deter “opportunistic class actions brought against directors for allegedly falling foul of the continuous disclosure obligations if their forecasts are found to be inaccurate” said the treasurer.

Parliamentary Inquiry
The Treasurer’s announcements over the past two weeks support the announcement by the Attorney-General Christian Porter on 13 May 2020 of an inquiry to examine all aspects of the class action system including scrutinising profits made by litigation funders.
Exposure to class actions on businesses impacted by COVID 19 will be one of the many issues addressed by the Committee. The Committee will make its findings and report by 7 December 2020.

Myer Class Action

The TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited [2019] FCA 1747 (Myer) should also provide some assurances to Insurers. The decision of the Federal Court found that whilst Myer may have misled investors, the market was not impacted by disclosure breaches and, most importantly, brought to the fore the difficulty plaintiffs had in proving shareholder loss. The case was dismissed.
What does this mean for D&O premiums?

We consider the regulatory requirements for funders, easing of “disclosure” obligations, the parliamentary inquiry and the decision in Myer ought to encourage more insurers back into the market for D&O and Side C cover.

That said, with the effects of COVID-19 and potentially more claims to follow, it may be that insurers bide their time before recommitting to the class.

This is not positive, particularly for ‘small cap’ publicly traded companies. Of the reported 38 class-actions since 1992, more than 76% have been brought against public companies exceeding $1bn in market capitalisation. It is apparent that the small cap companies are paying for the losses of the “big guys”.

Steps you can take:
Our recommendations are:
  • internal governance and compliance, including adaptation to COVID-19, stress testing and open communication with the market is absolutely necessary

  • take external professional advice on risk management across disclosure obligations to the market, workplace management and processes, information technology and cyber/privacy risk

  • engage early with the insurance market, in particular your broker

  • prepare a comprehensive underwriting submission for insurers, allow them 6 weeks to assess your risk

  • where possible, have your broker facilitate engagement with your insurer pre-renewal

  • budget for increased insurance costs.

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