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D&O market faces prolonged claims activity as recession bites

The D&O market is braced for a prolonged period of increased loss activity as the withdrawal of government economic support, coupled with ongoing economic uncertainty, threatens a sustained period of company insolvencies.


Senior market sources quizzed by this publication said that the future claims landscape remained highly uncertain, but as state support for struggling firms begins to dry up, the resulting corporate turmoil is expected to lead to a sharp increase in D&O losses via insolvency claims and disclosure-based lawsuits.

Whilst there is increasing optimism that litigants will struggle to pursue directors with opportunistic securities class actions caused by general stock market drops, it is expected that company disclosures will come under tighter scrutiny and result in lawsuits.

A key concern is that generous government support schemes across the world have been masking the true damage done to companies – particularly in stressed sectors such as retail and travel – and that businesses will begin failing at a higher rate once state aid inevitably dries up.

“When the music stops what happens then?” said one underwriter. “How many of these companies have borrowed too much and can’t service their debt?”

Underwriters said that the economic shock could last for several years and was likely to sustain sky-high premiums, which have left many clients struggling to find affordable cover.

“The hangover from this could last some time,” one source said.

Recessions and resultant company failures are fertile ground for D&O claims, as investors attempt to pursue directors to recoup losses.

Notifications increased following the previous financial crisis in the late 2000s. Following the onset of the 2007 global financial crisis, Marsh reported a 75% increase of D&O notifications for clients in the UK.

However, sources said that it often proved challenging for claimants to pin stock market drops on the actions of individual directors in securities claims, due to widespread valuation declines.


Lawyers speaking to this publication suggested that the nature of current economic conditions and huge levels of uncertainty meant it could be more likely that claims are successful in this recession.

Since the financial crisis, the costs of legal representation and settlements have increased consistently, which is likely to lead to more severe losses this time around.

Meanwhile, government support measures have buoyed stock markets, leading to concerns that many businesses are overvalued. A rapid correction in share prices can be a driver in the frequency and severity of securities class actions.

The D&O market has been hardening consistently since 2018, but the onset of the pandemic last year led to an extraordinary acceleration in rates, which was compounded by the withdrawal of key markets in the sector.

The market was responding to years of significant losses and inflated settlements, but rating adjustment partly reflected the fear that Covid-19 would negatively impact the loss landscape.

Pricing conditions have attracted start-up insurers and other entities without a legacy book to join the class, with the likes of Inigo, Scor Specialty Insurance and ERS all set to start writing management liability business this year.

The legal landscape

One of the biggest drivers of D&O losses in recent years has been securities class actions in the US.

The rate of filings remains well above the historical average, but trailed off by 20% in 2020, with a total of 334 federal and state filings, down from a high of 427 in 2019, according to Cornerstone Research.

The decline was led by a reduction in state court filings and filings related to M&A activity.


There were 19 complaints filed relating to Covid-19, including allegations that companies negatively impacted by the virus failed adequately to disclose the virus’s adverse effect on company financials, and made misleading statements about products under development.

However, market sources expressed satisfaction that a slew of claims from class actions did not come to fruition following general stock market crashes in the spring.

“It’s very difficult to pin a case on an individual company,” one source said. “That’s consistent with the financial crisis.”

However, economic stress and the rise in insolvencies are likely to result in claims.

In the UK, insolvencies remained low in 2020 compared with 2019, thanks to government support. There were fewer insolvencies every month year-on-year since the beginning of lockdown measures, apart from December in 2020, according to Insolvency Service data.

In the US, there were 630 corporate bankruptcies in 2020, the highest level since 2010, according to S&P Market Intelligence.

“Looking round the corner I think it’s right there will be an increase in insolvencies in 2021, and inevitably when you get insolvencies, it will increase the number of D&O notifications,” said James Wickes, a partner at the law firm RPC.

Wickes said that there would be heavy scrutiny of companies that had gone insolvent after taking on large amounts of debt and government loans, as well as crisis management and disaster recovery systems and controls.

“One of the big exposures for D&O policies is investigation costs,” he added.

“Whilst the things that get the most headlines are securities class actions in the US, which is obviously still a very big exposure and creates very big claims payments, the more attritional and increasingly significant exposure is in relation to regulatory or insolvency related investigation costs.”

Boies Schiller Flexner partner Fiona Huntriss said that the nature of the current economic environment may increase the likelihood of claims against directors being successful, leading to D&O insurance losses.

“Whereas every recession brings about a risk of claims being brought, I think now we are seeing an increased chance of those claims sticking because of the particular circumstances, which is a double whammy of a recession in terms of the financial situation and the absolute uncertainty,” she said.

The ongoing nature of the crisis will also make it more difficult for directors to absolve themselves of responsibility due to the unpredictable nature of trading conditions.

“There is going to come a period where trading is allowed but things aren’t back to normal as they were,” Huntriss said. “I think then it is more difficult for a director to say, ‘I am absolved by this macro crisis.’”

SMEs are thought to be at the greatest risk of insolvencies, due to the comparative difficulties of fundraising, whilst public companies will face the greatest scrutiny over filings and disclosures.

In addition to D&O losses, there is concern about the employment practices liability market, where claims could be brought by employees for unfair dismissal, or inadequate home working conditions having resulted in health issues.

There is also growing concern about the boom in claims arising from special purpose acquisition companies (Spac).

According to Cornerstone Research, more than half of IPOs in 2020 involved Spacs, and there were five Spac-related claims filed.

Resilient pricing levels

Underwriting sources said that the economic challenges were expected to be felt for years to come, meaning carriers would push to sustain premium levels.

“I think that’s why we will see the market being sustained at the current levels and increasing,” said one source. “It’s not like previous cycles. Carriers are still paying for their back years. I think we are in for a bit of a sustained period.”

Another source concurred and added that part of the market correction was due to long-term under-pricing, rather than the onset of the pandemic specifically.

There is new capacity coming into the market from carriers including Mosaic, Scor Specialty Insurance, Inigo and ERS, which is expected to stabilise conditions somewhat by the second half of the year, although it will remain tough for brokers.

Most carriers have extensively rewritten their books, trimmed exposure and increased retentions.

“Gone are the days when people are putting out $20mn lines,” one source said. “$5mn seems like a more standard size.”

In addition, the incoming capacity is not expected to match that which has already left, especially after Axa XL – a major lead market – exited management liability and financial institutions business in London last year.

“The amount of new capacity that’s coming into the market is dwarfed by what has left,” one source said.

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