As the cost of Directors & Officers (D&O) liability insurance cover continues to soar, many businesses are beginning to question its affordability. 
Despite the easing of UK lockdown restrictions in April this year and the renewed hope of returning to ‘business as usual’ by June, many companies are continuing to struggle with the financial strain caused by COVID-19, which rising insurance costs are exacerbating. 
However, while business budgets are being stretched more than ever before, we look at why D&O insurance is more important than ever. 
What is D&O Insurance and Who Does it Cover? 
D&O is designed to protect the individual decision makers within a business against any ‘wrongful acts’ committed whilst acting in their working capacity. Cover includes legal defence costs, compensation, awards for damages and civil fines where insurable under UK law. 
‘Wrongful act’ is typically defined as any – 
Breach of Trust 
Breach of Dut 
Defamation and/or 
Wrongful Trading. 
The policy is primarily taken out by incorporated companies, clubs, and charities to protect their directors and officers against claims brought against by regulators and/or any stakeholder. 
There are three main heads of cover, with 2 and 3 as optional for an additional premium – 
Directors and Officers (D&O) 
Corporate Legal Liability (CLL)  
Employment Practices Liability (EPL) . 
Is D&O the same as Professional Indemnity (PI)? 
Simple answer is, No. 
The main difference is PI covers the company which incorporates vicarious liability for the actions of its employees and D&O protects the individuals personally for acts carried out in their working capacity. 
PI covers the negligent acts, errors or omissions of an organisation that provides advice, design or service for a fee (or where a 'special relationship' exists) which falls below that reasonably expected of a professional in the industry. For a claim to be successful, the plaintiff (claimant) must be able to establish that they have suffered a ‘financial loss’ which is primarily brought against under Contract Law, unless a ‘Special Relationship’ exists between the parties and a claim can arise under Tort Law, established in ‘Hedley Byrne & Co. Ltd and Heller & Partners Ltd’ 1964. 
If you are interested in learning more on ‘Financial Loss’, I highly recommend you read ‘Financial Loss. What is it and when is it covered?’ by the International Underwriting Agency (IUA). 
Why have D&O Insurance Costs Increased? 
This major shift in the D&O market fundamentally comes down to sustained market losses, which can be broken down into the following non-industry specific reasons – 
Rise in the number of claims made. 
Increase in the cost of claims paid. 
Deterioration of prior-year claims history 
Change in regulatory and legal risk landscape. 
Reduced competition as more insurers exit the market than enter. 
D&O rates have been on the increase since 2018 on average by 35% with a further 50% rate hike in 2019 according to Marsh JLT Speciality D&O pricing report. In 2020, the average client saw rate increases between 47%-110% according to Willis Towers Watson GB D&O Market Update
COVID-19 hit the UK economy like a bombshell, making companies rethink their short and long-term strategy and operating model overnight to face unavoidable closure. Government intervention introduced new laws and regulations to stop the spread of the disease in the process creating new D&O exposures by expanding litigation and regulatory risk. 
We have seen a rise in insolvencies, alleged wrongful trading and poor decision making, with further claims predicted when government support dries up as a company’s stakeholders feel their interest were handled during the crisis. 
The pandemic compounded the hardening effect where insurer liquidity was being squeezed due to profit pressures and more insurers exiting the market than entering. This led a reduction in appetite and line sizes, causing insurers to rethink the affordability to continue writing the primary and low excess markets leading to sizeable premium increases, higher excesses and more restrictions in cover. 
What you can be doing 
Here are some key areas to bear in mind that insurers focus on when assessing a risk – 
Financial stability – a company’s solvency is a material risk factor and so insurers will want to see stable balance sheets and cash flows when assessing a risk. 
Corporate governance – how a company is governed is critical to the risk. It is essential to have tight controls and procedures in place as this will reduce both the number and amounts paid in claims. 
USA/Canada Exposure – keep to a minimum. The US is a highly litigious operating environment which sees a far greater number of lawsuits and class actions that typically sides with the plaintiff. 
Majority shareholder – previously considered a positive, insurers are now seeing a higher number of claims arising from major shareholders who are able to exercise greater control and influence. 
Mergers and acquisitions (M&A) – any M&A will inevitably leave some stakeholders unhappy naturally induces a greater number of claims to be brought against. In the event you have undergone a recent M&A, then we suggest you outline the company’s integration plans and governance controls. 
Do I Need D&O Insurance? 
The changing risk landscape has led to greater emphasis on the accountability and liability of a company’s directors & officers highlighting the importance of cover in a post pandemic era. 
At Johnson Insurance Services, our experience and expertise mean our clients can trade in the confidence that we understand their business, the risks they face and on hand to provide the support when really needed. 
For more information, please contact our team on 01904 217455 or get in touch via email
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