The type of insurance to protect employees requires more environmental protection, according to experts.
“D&O” insurance provides directors and officers of a company liability protection by relieving them of responsibility in the event that the insured company suffers legal damage.
Attorney David Goodwin, who practices law in Covington and Burling, San Francisco, estimated that rates rose 30% from 2019 to 2020. This is a doubling of the previous year’s increase. The number of claims seems to be in line with increasing rates.
Prices go up because airlines pay more claims. Some even hesitate to sell the unique type of insurance.
Goodwin, who specializes in commercial policyholder coverage, says this made it harder to obtain coverage. There are more than 20 airlines in the San Francisco Bay Area that manage specific coverage, most of which are not based in the area. An estimated 50 insurance companies run it across the country.
“To do the industry justice, (the freight forwarders) try to offset the money they had to pay for significant claims. And many customers are seeing a significant increase in premiums, ”he told the Business Journal.
The rise in interest rates is putting additional pressure on companies to provide them to their top executives. This type of insurance is expected to be included in employment contracts and statutes.
“It’s hard to spend money on it, but you can’t find good people without it,” he said.
Dereick Wood of ABD Insurance and Financial Services, headquartered in San Mateo and with offices in Petaluma, said the surge in rate hikes wasn’t necessarily due to COVID.
“Prices are based on loss from carriers,” said Wood, an insurance broker with 15 years of industry experience.
Companies may need to compensate their executives for a variety of reasons. For private companies, D&O insurance often covers cases of unlawful termination. Fiduciary violations are common among public companies. Managerial misconduct is also a factor for both of them.
In Wood’s eyes, one of the most egregious cases was a Wells Fargo scandal in which managers pressured bank employees to create fake accounts in order to increase their sales. The case brought by the bank’s customers was settled four years ago for over $ 100 million.
Due to such high profile cases resulting in significant payouts to victims, the award prices can fluctuate widely depending on whether a company is private or public and how big it is. For example, a private company with about 100 employees can spend about $ 50,000 on annual rewards. A large public company like Pacific Gas & Electric may have to shell out “several million,” said Wood.
I’m counting on holding top managers accountable
The utility could see these rewards being used in negotiating the firestorm of lawsuits it has faced as a result of the surge in northern California wildfires over the past four years.
Top executives are facing one such lawsuit filed in the San Francisco Supreme Court on February 24 against 22 former executives. The complaint alleges they were responsible for their role in starting the 2017 North Bay flames, including the Tubbs Fire and the 2018 Camp Fire Inferno. In the fire victim lawsuit cited by trustee John Trotter, the released defendants are accused of “breaching their fiduciary duties to act in the best interests of PG&E”.
More than 100 people were killed and thousands of homes damaged or destroyed in those two years.
“It is our duty to hold the former officers and directors accountable for grossly neglecting their jobs in the lead up to the North Bay fires and the campfire,” Trotter said in a statement.
The campfire mowed the town of Paradise as a result of centuries-old “C-hook” equipment on a transmission mast along the Feather River, which did not stabilize the power lines in the wind. The utility had not installed a shutdown system in the North Bay.
The Fire Victims Trust will gain at least $ 200 million from the lawsuit, which will allow the funds to be reclaimed from the policy.
“They knew about the company’s exposure. They were more concerned about the bottom line, “Cotchett Pitre & McCarthy attorney, Mark C. Molumphy, told the Business Journal. “It was a recipe for disaster.”
A perfect storm
According to Tom Griffith, senior vice president of Don Ramatici Insurance, a Petaluma brokerage firm, if the claim involves a lawsuit, insureds will have to pay other incidental expenses from the insured in addition to increasing rates.
“We are certainly seeing a hardening of the market, which depends on the frequency of claims and the severity of claims based on litigation costs,” he said.
Beyond the well-known case of the trust of PG&E fire victims, much of the spike in costs and litigation has resulted from a growing number of cases emerging from the “Me Too Movement”, in addition to the more well-known fiduciary violations.
As these types of cases are on the rise, top executives are even more careful to ensure that their companies have this type of coverage.
“Today one of the first questions anyone asks themselves – how well are you protected?” Said Griffith.
A snowball effect
And when costs go up, actuaries keep track of trends in the market, which leads to the number of airlines choosing to stop selling.
“It’s not just the payouts that are driving interest rates up. It could just be the increased frequency (can cause that). You have to make up the cost, ”said Jeff Okrepkie of the George Peterson Insurance Agency in Santa Rosa.
The agent has found that the past year has resulted in tense situations – in the workplace and beyond.
“Any allegation that one or more officers failed to do their job can lead to the allegations we see,” he said. “Emotions are increased.”
An insurance company in the Bay Area calls the market “desperate”.
According to Woodruff Sawyer’s Priya Cherian Huskins, who works in the insurance company’s San Francisco office as senior vice president of management liability, the company recently produced a report and found that “litigation rate is still increasing from 2019 to 2020,” wrote Huskins.
The report found that class action lawsuits in the nation hit an all-time high of 268 in 2019 and continued to increase to 210 in 2020. For comparison: in 2011 there were 141.
In addition, Huskins said it was “more worrying” how many “unsolved cases” the carriers have.
“Airlines are concerned about how these losses will affect them,” she wrote.