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March 4, 2015

What to Expect on Management Liability

Summary:

The market has become tough for those buying management liability insurance -- and may get even tougher.

Photo Courtesy of Paul Stocker

Gradually, over the last four-plus years, several management liability insurance (MLI) carriers have shifted their underwriting appetite and guidelines nationally, most dramatically in California. These changes have included some combination of:

·         Increased rates
·         Increased retentions
·         Reductions in coverage
·         Reductions in total limits offered
·         Reductions or removal of wage and hour defense cost sub-limits
·         Non-renewal of insureds based on industry, asset size, financial condition or loss experience.

This is quite a change, as for the previous 10-plus years there has been a surplus of capacity and MLI carriers were eager to write accounts at very attractive rates and terms. While there are still numerous MLI carriers with significant capacity, including some new entrants, the marketplace appears to be reaching a point where this capacity will no longer be use to offer the terms and pricing that we had been accustomed to seeing. This raises the question, “Why?”

Based on our conversations with MLI carriers in this niche, here are a few of the reasons:

·         Poor economic conditions five to seven years, ago leading to a significant spike in the frequency of employment practices liability (EPL) and directors and officers (D&O) related claims

·         Dramatically rising EPL claims expenses (even if a claim is without merit — remember, these policies cover defense costs)

·         Significant and continual increase in the filing of wage and hour claims (wage and hour suits are up 4.7% in the last year and 437% in the last decade)

·         Uptick in D&O claims involving bankruptcy-related allegations, breach of contract, intellectual property, federal agency investigations and judgments, family claims  and restraint of trade

·         The duty-to-defend nature of the policies, forcing carriers to provide a wide expanse of defense coverage for what might be arguably uncovered claims or insureds

What can our current (and new) non-profit and privately held management liability insureds expect as a result of the changes in the marketplace?

Our recommendation is to set expectations as follows:

·         There will be increases in retentions and premiums.

·         Smaller clients will need to absorb bigger percentage increases in premium and retention (as well as possible reductions in coverages), although in many situations the incumbent carrier will still be the best option if the increases are not outrageous.

·         A reasonable degree of competition and capacity will still be available for the larger management liability client. This may help mitigate increases in premium and retention.

·         Increases will be felt by insureds located in major cities (carriers generally still like risks in smaller cities and outside of states such as California, Florida, Illinois, New York and New Jersey).

·         Coverage for the defense of wage and hour claims will be more difficult to obtain and, when available, likely more expensive to purchase and with possibly lower limits or higher retentions.

·         Non-renewals by some carriers, based primarily on class of business or location. Some of these classes of business include:

o    Real estate

o    Healthcare

o    Restaurant/retail

o    Social media

o    Pharmaceuticals

o    Tech/start-ups

·         Carriers are asking for much more underwriting information than they have previously, especially if the insured has challenging financials, the insured is seeking additional funding or the insured has a challenging loss history.

Since 2010, Socius has been advising our clients that the MLI market appeared to be trending toward a hardening, following on the heels of numerous years of softness. As we get deeper into 2015, we continue to believe that this is the case.  The gradual transition that we initially described has, in fact, taken firm hold. We hesitate to pronounce the market as officially “hard” only because we hear rumblings that suggest that market conditions could very well deteriorate further, making what we consider hard today even harder.

For the moment, the watchword to agents and brokers is: “Manage expectations!  Difficult news is coming, so let clients know early – and often.”

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About the Author

Laura Zaroski is the vice president of management and employment practices liability at Socius Insurance Services. As an attorney with expertise in employment practices liability insurance, in addition to her role as a producer, Zaroski acts as a resource with respect to Socius’ employment practices liability book of business.

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