Management liability policies get stronger

This article is based on our 2007 review of the growing market for private company management liability insurance. This product combines several lines of business coverage into a single policy.
In our 2007 survey, we obtained information from 17 insurers and MGAs, which we believe represent the core of this market, although several other carriers offer similar products. The participants were ACE, American International Group, Axis, Chubb, Cincinnati Insurance Co., CNA, E-Risk Services (for ACE), Fireman's Fund, Great American, Hartford, HCC Global (Houston Casualty), Monitor Liability Managers (for Admiral and Carolina Casualty), NAS, Philadelphia Insurance Co., RLI, Travelers and Zurich.
We have tested the insurers' responses against our own experience and knowledge. Where they conflict, we have reviewed the inconsistencies with the carriers. However, the evaluation and conclusions are our own.
In most cases, we examined actual policy forms and endorsements provided by the carrier. Rather than reproduce their exact policy wording (which, of course, can be voluminous), in many cases we have paraphrased their wording in the interest of brevity and simplicity. Of course, the insurance policies govern the coverage provided, and the carriers are not responsible for our interpretation of their policies or survey responses. Readers should understand that the information in this report applies to the carriers' standard products and that special arrangements may be available on a negotiated basis.
The private company management liability product is a combination of various lines, all of which are generally related to the insured's business practices. The core coverages are liability forms, but additional ones (e.g., crime and kidnap and ransom) are available from some carriers.
Most carriers include the following core liability coverages in their products: directors and officers liability insurance, employment practices liability insurance, third-party discrimination and harassment insurance and fiduciary liability insurance.
Some carriers' products also contain one or more of the following: kidnap and ransom insurance, crime insurance, intellectual property liability insurance (rarely), Internet liability insurance, identity theft insurance, miscellaneous professional liability insurance, employed legal counsel insurance, media liability insurance, crisis response insurance and workplace violence insurance. The product of one market covered by our survey also included tenant discrimination insurance. An insured is not required to buy each coverage. Other than for D&O and EPLI, insureds can pick and choose according to their needs and budgets.
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 particularly apparent to insureds who compare stand-alone EPLI policies with a combined product. In the past, adding EPLI to a D&O policy resulted in narrower EPLI coverage. However, the EPLI portion of today's management liability product is greatly improved, making the combination far more attractive.
Recent enhancements: New coverage forms are prevalent, and carriers are regularly rolling out improved and simplified policies. Significant product changes noted in this year's survey included the following:
–CNA introduced EZPack, a product for small employers (under 50 employees). It has a separate defense costs limit, third-party EPLI coverage, 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 include larger companies (those with more than $350 million in annual revenue).
–E-Risk Services (ACE) made its product available to nonprofit organizations.
–Chubb expanded its eligibility list to include health-care organizations.
Market growth: We did not ask carriers to estimate total market volume, but we continue to see significant growth in the management liability products market. To encourage response and reduce the chance of inflated answers, we promised respondents complete confidentiality in regard to their state-of-the-market estimates. Unfortunately, fewer and fewer carriers are willing to share this information in the post-Spitzer era. Nevertheless, based on confidential conversations, we concluded:
–Premium growth (projected 2007 versus 2006) is under 10%, generally attributed to rate reductions and slowing growth in new insureds.
–Rates are down 5% to 10% for good insureds, a bit more (maybe 10% to 20%) for the most attractive risks and the most aggressive insurers.
–Reinsurance support is increasing.
We see several smaller carriers writing a significant amount of premium in this line, and we hope that they are able to get sufficient rates for the risks they are assuming.
Claims: We did not solicit information about claims experience, because of the large number of coverages in the management liability product line. Anecdotally, we understand the product is reasonably profitable. EPLI portions are not so profitable, but the line in general seems to be. The claims pressure on the EPLI line is not surprising when one considers the claims experience for monoline EPLI products. As the economic outlook continues to grow uncertain, increasing claims frequency is to be expected. Overall, we expect claim pressure, over the long-term, to push rates and deductibles somewhat higher. We do not foresee a restriction in coverage breadth or availability.
Target markets: Carriers usually focus this product on small and midsize companies, but eligibility can vary significantly from one insurer to another. In regard to an eligible insured's number of employees, the responses range from fewer than 500 to fewer than 10,000. Similarly, maximum eligible gross revenue ranges from less than $100 million to less than $1 billion. Three respondents said they'd take private companies of any size.
While size is becoming less of a barrier to obtaining management liability insurance, the nature of a prospect's business still is. Among the frequently mentioned prohibited classes are financial institutions, governmental entities, health-care organizations and high-tech firms. Some survey respondents also cited businesses that one assumes have an above-average risk of litigation, like gun manufacturers/distributors and tobacco- or asbestos-related companies. Not surprisingly, some insurers also specify that companies planning initial public offerings of stock also are ineligible.
Limits and deductibles: For the insurers taking part in the survey, available D&O limits generally range from $500,000 to $25 million. Most report, however, that their largest clients (those with $500 million or more in annual revenue) usually opt for D&O limits of $5 million or $10 million. At the other end of the scale, most clients with less than $10 million in annual revenue buy limits no greater than $1 million.
Management liability policies offered by the survey's participating insurers offer a variety of aggregate-deductible options:
–A separate annual aggregate for each coverage. Therefore a policy-limits loss for EPLI, for example, does not erode the coverage for D&O. All but two surveyed insurers offer this option.
–A combined annual aggregate for all coverages. This option, which all surveyed insurers offer, obviously provides less protection than separate annual aggregates.
–A combined multiyear aggregate for all coverages. This option, although it may earn an insured lower rates, is the riskiest of the three. Half of the survey's participating insurers (nine) don't even offer it.
To counter the risk of inadequate aggregate limits, most carriers in our survey offer reinstatement of limits options (generally subject to negotiation and underwriting, of course).
Defense provisions: Most insurers surveyed offer duty-to-defend forms. There is a lot of flexibility, however, in how these policies respond to a claim. Some carriers let insureds decide at the time of the loss whether to defend claims themselves and then seek indemnification from the insurer, or whether to turn over the claim to the carrier at the outset. A few of the surveyed insurers provide indemnity coverage for D&O claims, but duty-to-defend coverage for everything else.
Definition of an insured: The definition of insured varies from policy to policy, and from coverage to coverage. The most significant differences are in the EPLI line, where coverage for independent contractors, leased employees and part-time employees is not automatically included in most policies. All surveyed insurers provide entity coverage, although a couple make it optional. All carriers provide a spousal coverage extension at no cost.
Claims reporting and ERPs: When a claim has to be reported is an important distinction among policy forms. Most carriers require the named insured to report “as soon as practicable,” which seems reasonable. Some limit the period to 60 or 90 days. In practice, unless the insured has delayed reporting so long (and irresponsibly) as to compromise the defense of the claim, there is little practical difference among carriers.
All surveyed carriers offer an extended reporting period, but its length and cost differ. Most of the carriers offer at least a one-year ERP, while six offer ERPs lasting three years or longer. Whether the ERP is one-way or two-way (bilateral) is an important distinction. If an ERP is one-way, it is available to an insured only if the carrier cancels or refuses to renew. A bilateral ERP, on the other hand, gives insureds the option to obtain an ERP even if they are the ones who cancel or nonrenew. Such ERPs are available from almost all carriers surveyed.
Selection of counsel: While most carriers continue to control the selection of counsel, almost all are flexible in allowing the insured to select or approve counsel. If the insured requests specific counsel approval at the right time (during proposal negotiations), the carrier is likely to approve the insured's choice. A few carriers offer the insured a choice of an indemnity policy, which gives the insured full control over selection of counsel.
Carriers that are primarily interested in larger employers are more likely to give selection of counsel to the insured than are carriers that specialize in smaller insureds. That's because the premiums that carriers targeting small insurers charge usually aren't large enough to support the expense necessary to approve special counsel requests. However, in our experience, carriers are generally willing to allow the use of the insured's choice of counsel, as long as they are clearly qualified. For the insured who asks, even the carriers that focus on the smaller end of the market are willing to allow the insured to select counsel.
Consent to settle: Carriers are understandably reluctant to give insureds much control over settlement, since D&O and EPLI suits often involve a good deal of emotion. Both employer and employee are often willing to continue their fight in court long after it makes economic sense to settle. Carriers are reluctant to fund such battles, of course.
The so-called “hammer clause” allows a carrier to limit its claim payment to no more than the amount it could have settled a claim for, 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 continue litigation after a case could have been settled. In these instances, the insurer and insured share the additional litigation costs.
The surveyed insurers take a variety of approaches to hammer clauses and soft hammer clauses. One imposes no hammer clause at all. Another requires a hammer clause for the policy's miscellaneous professional liability coverage; otherwise, it drops it for insureds that elect coverage with defense included in policy limits. Another has a soft-hammer clause in which the insurer pays 75% of defense and indemnity exceeding the original settlement proposal. Another forgoes a hammer clause in the D&O coverage. At least a couple of the insurers employ a “carrot” as well as a hammer, granting a 10% deductible reduction to insureds who accept a first settlement offer.
Exclusions: Policy exclusions vary widely. Some carriers in our survey exclude professional liability, although sometimes only for the entity, as opposed to directors and officers and other individuals. Six of the insurers do not cover punitive damages, while others provide it only by endorsement. Most of the carriers surveyed provide intentional-acts coverage, although it may be nuanced. Five of the insurers, however, exclude such coverage altogether.
Summary
The private company management liability market is a big one, served by a combination of large participants such as AIG and Chubb, and a number of smaller carriers too numerous to mention. Some of these smaller carriers clearly have their sights set on growth and have made significant product improvements. Information last year indicated that these smaller carriers were adding premium at a rapid clip, but that pace has now slowed. Insureds are sensitive to premiums but fortunately seem reluctant to change carriers for only small reductions in cost. There are times, however, when changing to a new carrier makes sense, especially if there are additional coverages included at a similar total premium. Still, we caution readers and their clients that they should be cautious about changing carriers, given the claims-made nature of coverage.
We welcome the ongoing product innovation in the management liability line. The product offers a good way for private (and nonprofit) insureds to buy coverages economically. There are important management liability risks that would be a good fit in these policies, including privacy violations and intellectual property liability. Some management liability carriers are beginning to include coverage for the former, but we don't hold out much hope for widespread coverage of the latter.
This article was derived from the August 2007 issue of The Betterley Report, which is published six times a year by Betterley Risk Consultants. The complete report, which contains charts showing the responses of individual insurers, is available for subscribers at betterley.com. A 30-day subscription costs $50; annual subscriptions are $159. For more information, contact Richard Betterley, CMC, at (877) 422-3366, at rbetterley@betterley.com, or visit www.betterley.com.