Managing Management Liability Risk in Today’s Market

The management liability insurance segment has attracted a lot of new capacity in the last few years, and the increased competition has pushed rates down significantly. But the segment faces growing risks from regulatory and technology-related exposures, making the quality of coverage and carrier, not the price, even more important.

There are several concerning trends that need to be carefully monitored within the directors and officers (D&O), employment practices (EPL) and fiduciary liability coverage lines, including the use of artificial intelligence (AI), corporate governance policies, ever-increasing defense costs and excessive fee litigation.

Clients may understandably opt for less expensive management liability policies without realizing the critical differences that exist between them, or how the company’s exposures are evolving.

It’s up to agents and brokers to ensure their clients are getting the best coverage for their needs, but first they need to understand the changing management liability landscape.

Directors and Officers Liability

D&O is perhaps the segment within the management liability space under the most pressure, as evidenced by AM Best’s decision in March to assign the U.S. D&O market a negative outlook.

Best said growing competition is fueling a supply versus demand problem for favorable risks, and there is concern over “rising legal expenses and growing exposures from new technologies, and regulatory pressures around environmental, social and governance costs.”

Directors and officers of private companies are under pressure to respond to global issues in a socially responsible way, particularly those related to climate change and artificial intelligence. Companies that don’t respond may face consumer backlash or class action litigation.

Antitrust is another area of concern based on increased enforcement of the law after years of a more lenient approach. Individual directors and officers may be liable for antitrust violations so it is important to know how your client’s D&O policy responds. Some policies may have a specific exclusion while others remain silent.

Traditionally, claims frequency is higher for EPL than D&O, but D&O claims tend to be more severe, which is the reason underpricing coverage now can create major market disruptions later on.

Employment Practices Liability

The business world has changed dramatically over the last five years, thanks in no small part to a shift to remote work necessitated by the COVID-19 pandemic, and the societal spotlight on employee harassment and discrimination.

While these trends are still of concern, the underwriting community is also now monitoring how the emergence of artificial intelligence could impact employment claims as more employers look to AI technology for recruitment and hiring.

Research by the Society for Human Resource Management in 2022 found that nearly one in four organizations were using automation or AI to “support HR-related activities, including recruitment and hiring.” Although 30% of employers said AI “improves their ability to reduce potential bias in hiring decisions,” according to SHRM, lawmakers and regulators are concerned AI-tools are having the opposite effect.

“Employers may use these tools in an attempt to save time and effort, increase objectivity and decrease bias,” the Equal Employment Opportunity Commission said in a 2022 guidance to employers. “However, the use of the tools may disadvantage job applicants and employees with disabilities.”

New York became the first state to pass a law regulating automated employment decision tools, with other states expected to follow suit.

Another challenge for employers is the ever-evolving legislative environment of employment law. There has been increased litigation in wage and hour claims, which includes misclassification of employees, failure to pay overtime, policing of rest breaks and meal breaks, among other violations. It is critical to understand wage and hour exposures, especially in states such as California, New York and Illinois, to name a few. Ensure your clients’ EPL policies include appropriate limits and coverage, if available, and focus on risk management strategies to help mitigate potential claims.

Fiduciary Liability

There’s been a significant uptick in excessive-fee litigation against fiduciary administrators of company retirement and benefit plans. The plaintiffs’ bar and the U.S. Department of Labor have brought many actions in this area, and in some cases reached historical settlements. As of 2020, an estimated $1 billion in settlements and more than $250 million in attorney fees had been paid by fiduciary liability insurance companies, a report from Euclid Specialty found.

Fiduciary liability has historically been a profitable line of business, so this trend is particularly concerning and worth watching closely. It is important to be aware of how much is being charged per plan participant as a way to gauge excessive fee exposure.

It’s up to agents and brokers to ensure their clients are getting the best coverage for their needs …

Coverage, Claims and Risk Management

Agents and brokers should ensure they are staying abreast of the many factors impacting their clients, closely scrutinize the quality of coverage offerings available, and be aware of what tools are available to help their clients mitigate risk.

In the overly competitive management liability market, agents will find the most success and provide the best service when they focus on coverage, claims expertise and risk management best practices over price.

Top tier companies often provide value-added services including complimentary or discounted risk management tools and access to experts for pre-claims assistance. For example, insureds can call a hotline for advice regarding employment questions, such as harassment or termination issues, and access tools such as state-required trainings or employee handbook templates. Understanding these additional services can help guide your client to make informed decisions about the support they need to mitigate potential lawsuits.

Lastly, ensure your clients are with a financially strong carrier with focused expertise in management liability and a solid history of paying claims. In this challenging marketplace, partnering with experts who understand the complexities of coverage will serve your clients well in the long-term.

Zanchelli joined Berkley Select in 2009 and currently heads the private and non-profit D&O, EPL, and Fiduciary product lines. He can be reached at czanchelli@berkleyselect.com.

Topics Liability Talent Human Resources