This article is based on our 2007 review of the growing marketfor private company management liability insurance. This productcombines several lines of business coverage into a singlepolicy.
In our 2007 survey, we obtained information from 17 insurers andMGAs, which we believe represent the core of this market, althoughseveral other carriers offer similar products. The participantswere ACE, American International Group, Axis, Chubb, CincinnatiInsurance Co., CNA, E-Risk Services (for ACE), Fireman's Fund,Great American, Hartford, HCC Global (Houston Casualty), MonitorLiability Managers (for Admiral and Carolina Casualty), NAS,Philadelphia Insurance Co., RLI, Travelers and Zurich.
We have tested the insurers' responses against our own experienceand knowledge. Where they conflict, we have reviewed theinconsistencies with the carriers. However, the evaluation andconclusions are our own.
In most cases, we examined actual policy forms and endorsementsprovided by the carrier. Rather than reproduce their exact policywording (which, of course, can be voluminous), in many cases wehave paraphrased their wording in the interest of brevity andsimplicity. Of course, the insurance policies govern the coverageprovided, and the carriers are not responsible for ourinterpretation of their policies or survey responses. Readersshould understand that the information in this report applies tothe carriers' standard products and that special arrangements maybe available on a negotiated basis.
The private company management liability product is a combinationof various lines, all of which are generally related to theinsured's business practices. The core coverages are liabilityforms, but additional ones (e.g., crime and kidnap and ransom) areavailable from some carriers.
Most carriers include the following core liability coverages intheir products: directors and officers liability insurance,employment practices liability insurance, third-partydiscrimination and harassment insurance and fiduciary liabilityinsurance.
Some carriers' products also contain one or more of the following:kidnap and ransom insurance, crime insurance, intellectual propertyliability insurance (rarely), Internet liability insurance,identity theft insurance, miscellaneous professional liabilityinsurance, employed legal counsel insurance, media liabilityinsurance, crisis response insurance and workplace violenceinsurance. The product of one market covered by our survey alsoincluded tenant discrimination insurance. An insured is notrequired to buy each coverage. Other than for D&O and EPLI,insureds can pick and choose according to their needs andbudgets.
By having coverage for various exposures combined into one policy,the insured is less likely to encounter disputes between carriers,the administrative burden for both insured and carrier is lessened,and premium economies can be achieved. This is particularlyapparent to insureds who compare stand-alone EPLI policies with acombined product. In the past, adding EPLI to a D&O policyresulted in narrower EPLI coverage. However, the EPLI portion oftoday's management liability product is greatly improved, makingthe combination far more attractive.
Recent enhancements: New coverage forms are prevalent, andcarriers are regularly rolling out improved and simplifiedpolicies. Significant product changes noted in this year's surveyincluded the following:
–CNA introduced EZPack, a product for small employers (under 50employees). It has a separate defense costs limit, third-party EPLIcoverage, an additional D&O limit for nonindemnified claims, a“soft hammer clause” and HIPAA wrongful acts coverage.
–Hartford expanded eligibility for its product line to includelarger companies (those with more than $350 million in annualrevenue).
–E-Risk Services (ACE) made its product available to nonprofitorganizations.
–Chubb expanded its eligibility list to include health-careorganizations.
Market growth: We did not ask carriers to estimate totalmarket volume, but we continue to see significant growth in themanagement liability products market. To encourage response andreduce the chance of inflated answers, we promised respondentscomplete confidentiality in regard to their state-of-the-marketestimates. Unfortunately, fewer and fewer carriers are willing toshare this information in the post-Spitzer era. Nevertheless, basedon confidential conversations, we concluded:
–Premium growth (projected 2007 versus 2006) is under 10%,generally attributed to rate reductions and slowing growth in newinsureds.
–Rates are down 5% to 10% for good insureds, a bit more (maybe 10%to 20%) for the most attractive risks and the most aggressiveinsurers.
–Reinsurance support is increasing.
We see several smaller carriers writing a significant amount ofpremium in this line, and we hope that they are able to getsufficient rates for the risks they are assuming.
Claims: We did not solicit information about claimsexperience, because of the large number of coverages in themanagement liability product line. Anecdotally, we understand theproduct is reasonably profitable. EPLI portions are not soprofitable, but the line in general seems to be. The claimspressure on the EPLI line is not surprising when one considers theclaims experience for monoline EPLI products. As the economicoutlook continues to grow uncertain, increasing claims frequency isto be expected. Overall, we expect claim pressure, over thelong-term, to push rates and deductibles somewhat higher. We do notforesee a restriction in coverage breadth or availability.
Target markets: Carriers usually focus this product onsmall and midsize companies, but eligibility can vary significantlyfrom one insurer to another. In regard to an eligible insured'snumber of employees, the responses range from fewer than 500 tofewer than 10,000. Similarly, maximum eligible gross revenue rangesfrom less than $100 million to less than $1 billion. Threerespondents said they'd take private companies of any size.
While size is becoming less of a barrier to obtaining managementliability insurance, the nature of a prospect's business still is.Among the frequently mentioned prohibited classes are financialinstitutions, governmental entities, health-care organizations andhigh-tech firms. Some survey respondents also cited businesses thatone assumes have an above-average risk of litigation, like gunmanufacturers/distributors and tobacco- or asbestos-relatedcompanies. Not surprisingly, some insurers also specify thatcompanies planning initial public offerings of stock also areineligible.
Limits and deductibles: For the insurers taking part inthe survey, available D&O limits generally range from $500,000to $25 million. Most report, however, that their largest clients(those with $500 million or more in annual revenue) usually opt forD&O limits of $5 million or $10 million. At the other end ofthe scale, most clients with less than $10 million in annualrevenue buy limits no greater than $1 million.
Management liability policies offered by the survey's participatinginsurers offer a variety of aggregate-deductible options:
–A separate annual aggregate for each coverage. Therefore apolicy-limits loss for EPLI, for example, does not erode thecoverage for D&O. All but two surveyed insurers offer thisoption.
–A combined annual aggregate for all coverages. This option, whichall surveyed insurers offer, obviously provides less protectionthan separate annual aggregates.
–A combined multiyear aggregate for all coverages. This option,although it may earn an insured lower rates, is the riskiest of thethree. Half of the survey's participating insurers (nine) don'teven offer it.
To counter the risk of inadequate aggregate limits, most carriersin our survey offer reinstatement of limits options (generallysubject to negotiation and underwriting, of course).
Defense provisions: Most insurers surveyed offerduty-to-defend forms. There is a lot of flexibility, however, inhow these policies respond to a claim. Some carriers let insuredsdecide at the time of the loss whether to defend claims themselvesand then seek indemnification from the insurer, or whether to turnover the claim to the carrier at the outset. A few of the surveyedinsurers provide indemnity coverage for D&O claims, butduty-to-defend coverage for everything else.
Definition of an insured: The definition of insured variesfrom policy to policy, and from coverage to coverage. The mostsignificant differences are in the EPLI line, where coverage forindependent contractors, leased employees and part-time employeesis not automatically included in most policies. All surveyedinsurers provide entity coverage, although a couple make itoptional. All carriers provide a spousal coverage extension at nocost.
Claims reporting and ERPs: When a claim has to be reportedis an important distinction among policy forms. Most carriersrequire the named insured to report “as soon as practicable,” whichseems reasonable. Some limit the period to 60 or 90 days. Inpractice, unless the insured has delayed reporting so long (andirresponsibly) as to compromise the defense of the claim, there islittle practical difference among carriers.
All surveyed carriers offer an extended reporting period, but itslength and cost differ. Most of the carriers offer at least aone-year ERP, while six offer ERPs lasting three years or longer.Whether the ERP is one-way or two-way (bilateral) is an importantdistinction. If an ERP is one-way, it is available to an insuredonly if the carrier cancels or refuses to renew. A bilateral ERP,on the other hand, gives insureds the option to obtain an ERP evenif they are the ones who cancel or nonrenew. Such ERPs areavailable from almost all carriers surveyed.
Selection of counsel: While most carriers continue tocontrol the selection of counsel, almost all are flexible inallowing the insured to select or approve counsel. If the insuredrequests specific counsel approval at the right time (duringproposal negotiations), the carrier is likely to approve theinsured's choice. A few carriers offer the insured a choice of anindemnity policy, which gives the insured full control overselection of counsel.
Carriers that are primarily interested in larger employers are morelikely to give selection of counsel to the insured than arecarriers that specialize in smaller insureds. That's because thepremiums that carriers targeting small insurers charge usuallyaren't large enough to support the expense necessary to approvespecial counsel requests. However, in our experience, carriers aregenerally willing to allow the use of the insured's choice ofcounsel, as long as they are clearly qualified. For the insured whoasks, even the carriers that focus on the smaller end of the marketare willing to allow the insured to select counsel.
Consent to settle: Carriers are understandably reluctantto give insureds much control over settlement, since D&O andEPLI suits often involve a good deal of emotion. Both employer andemployee are often willing to continue their fight in court longafter it makes economic sense to settle. Carriers are reluctant tofund such battles, of course.
The so-called “hammer clause” allows a carrier to limit its claimpayment to no more than the amount it could have settled a claimfor, plus defense costs. This protects the carrier against a“litigate at any cost” insured. Some insurers offer a “soft hammer”clause, which is less onerous to an insured who wants to continuelitigation after a case could have been settled. In theseinstances, the insurer and insured share the additional litigationcosts.
The surveyed insurers take a variety of approaches to hammerclauses and soft hammer clauses. One imposes no hammer clause atall. Another requires a hammer clause for the policy'smiscellaneous professional liability coverage; otherwise, it dropsit for insureds that elect coverage with defense included in policylimits. Another has a soft-hammer clause in which the insurer pays75% of defense and indemnity exceeding the original settlementproposal. Another forgoes a hammer clause in the D&O coverage.At least a couple of the insurers employ a “carrot” as well as ahammer, granting a 10% deductible reduction to insureds who accepta first settlement offer.
Exclusions: Policy exclusions vary widely. Some carriersin our survey exclude professional liability, although sometimesonly for the entity, as opposed to directors and officers and otherindividuals. Six of the insurers do not cover punitive damages,while others provide it only by endorsement. Most of the carrierssurveyed provide intentional-acts coverage, although it may benuanced. Five of the insurers, however, exclude such coveragealtogether.
Summary
The private company management liability market is a big one,served by a combination of large participants such as AIG andChubb, and a number of smaller carriers too numerous to mention.Some of these smaller carriers clearly have their sights set ongrowth and have made significant product improvements. Informationlast year indicated that these smaller carriers were adding premiumat a rapid clip, but that pace has now slowed. Insureds aresensitive to premiums but fortunately seem reluctant to changecarriers for only small reductions in cost. There are times,however, when changing to a new carrier makes sense, especially ifthere are additional coverages included at a similar total premium.Still, we caution readers and their clients that they should becautious about changing carriers, given the claims-made nature ofcoverage.
We welcome the ongoing product innovation in the managementliability line. The product offers a good way for private (andnonprofit) insureds to buy coverages economically. There areimportant management liability risks that would be a good fit inthese policies, including privacy violations and intellectualproperty liability. Some management liability carriers arebeginning to include coverage for the former, but we don't hold outmuch hope for widespread coverage of the latter.
This article was derived from the August 2007 issue of TheBetterley Report, which is published six times a year by BetterleyRisk Consultants. The complete report, which contains chartsshowing the responses of individual insurers, is available forsubscribers at betterley.com. A 30-day subscription costs $50;annual subscriptions are $159. For more information, contactRichard Betterley, CMC, at (877) 422-3366, at [email protected],or visit www.betterley.com.