Private, Nonprofit D&O: Gallagher’s Norton on Claims, Coverage Expansion and Outlook

Much has changed in the insurance industry throughout the past 20 years. What hasn’t changed so much is the type of claim to strike the private company and nonprofit directors and officers (D&O) sector. What has changed is the coverage for those claims.

Phil Norton, president of the professional liability division for Arthur J. Gallagher & Co., says while the sources of nonprofit D&O claims has remained the same over the last two decades, the difference today, as opposed to 20 years ago, is now those claims are being covered. Coverage is broad, competition is high, markets are plentiful but claim severity is on the rise.

In this interview with Insurance Journal‘s Andrea Wells at the recent PLUS D&O Symposium in New York City, Norton discusses nonprofit and private company D&O claims trends, the expansion of entity coverage in this segment, and what he sees on the horizon for the market and his clients.

To listen to the full audio interview, or to watch a video with Norton, visit www.InsuranceJournal.tv.

Insurance Journal: What has changed in the nonprofit D&O world in the last 20 years? Have claims changed or has coverage changed?

Phil Norton: That’s a great question. … I used to track these claims for a company I used to work for … I was looking at 700 claims a year. The sources of these (D&O) claims, 20 years ago, are the same as today. The difference is a lot of those claims 20 years ago were not covered, and therefore not generating any claims payment. Now those are covered.

They’re generating lots of claims payments.

The carriers are saying, “Wait a minute. I’m underwater. I’m paying out more claims than I’m taking in, in a premium.”

That’s really the evolution …. the coverage. It started in the late 1990s, when a firm called Executive Risk came out with a form called “Power,” which had this inventive idea of, “Why don’t we add the entity as covered in addition to the individual D’s (directors) and O’s (officers),” and it went from there.

IJ: Is entity coverage something you always want for your clients? Are you able to always secure it?

Norton: So far we’re able to always get it. What’s happening (now) is that some of the carriers are looking to take it away; they feel like they’re offering too much coverage. They’re giving you one premium that’s lower with no entity coverage, and then a premium that’s much higher, maybe 35 percent higher, that does have entity coverage. I’m telling my clients to pay more money and buy the entity coverage, because it’s a great value. Currently, I’m able to get entity coverage for all of my clients.

IJ: Why is including entity coverage so valuable?

Norton: If you look at the types of claims that are brought against private companies, and these include employment practices liability, if you didn’t have entity coverage for EPL, you wouldn’t have almost any of your claims covered at all.

The courts have determined that there’s this “agency” theory. When you do something wrong as an employee, you’re doing it as an agent of your corporation. Therefore, your corporation is liable, so it is an entity claim.

Half the claims against private companies are EPL. When you start to look at the lesser known claims, like deceptive trade practices with the competition, or antitrust, those are often about the entity. The entity stole information.

They don’t necessarily go after an individual. Sometimes they name both. I’m thinking 90-plus percent of these claims have some element of entity in it, and then there’s a big overlap where individual directors and officers are also named.

IJ: How big is the D&O market for nonprofit and private companies today?

Norton: It’s just a lot of carriers, which is generating a lot of competition. … (Carriers) jump in, and they find that just the fact that they jumped in is changing results. It drives premiums down and it turns out that losses have been increasing steadily for a long time.

When I say, “losses increasing steadily,” I primarily mean the fact that more of these claims are covered, but not exclusively. Defense attorneys are charging more per hour, and they’re putting more of their partners on each claim.

If you had someone at $300 an hour, and now there are two people each at $350, you haven’t gone up just a little bit. You’ve more than doubled. So we’re seeing defense costs increasing rather dramatically.

Severity is going up. I feel like frequency is somewhat stable. …

There are some geographic areas, or maybe by market sector, perhaps healthcare, where there is some frequency increase.

By and large, I feel like the frequency is pretty stable; the issue is severity.

IJ: What are the barriers when trying to sell D&O coverage to a smaller private company or nonprofit organization? What makes it challenging to convince them to buy coverage?

Norton: I think it’s education most of the time. They think they already have it covered.

First of all you have to correct them that these things are not covered by your other policies.

The second thing is there is a little bit of cost. To them this could be significant depending on the size of the organization, so you have to show them that there’s value.

They’re going to say, “I’ve never had a claim. Why do I need coverage?” You might say, “Has your house burned down? Are you going to continue to have house insurance, fire insurance for your house, homeowners?”

The same thing applies here; in a 10-year period, one-third of all these private companies are going to have at least one claim, and sometimes multiple. It is going to happen, and that’s part of the education process.

What they need to realize is they’ve already got the exposures. They have employees. They have the 401(k) plans for their employees. They’re managing a lot of revenues, which is creating some risks for crime.

There are these pieces of management liability, in which D&O is the visible name, but there are also employment practices, liability, fiduciary, and crime. They’re all often sold in a package. Some carriers will sell them in a blended package where you can get efficient with your limits to some extent.

IJ: What do you see on the horizon for the private company and nonprofit D&O segment? Is there anything that you’re keeping your eye on?

Norton: First of all, I want to keep my eye on maintaining coverage. I think that’s critical and I think it’s doable. We want to make sure we have narrow contractual liability exclusions. We want to make sure we have broad definitions of claims.

One area that we can barter with, which I think is completely appropriate, is retentions.If they want to raise the deductibles, that actually might not be a bad thing for my clients. Stability over the long-term in terms of paid losses is what keeps the premiums relatively reasonable. If you’re going to have a bunch of small ethereal claims just through bad luck, there’s no rule that someone can’t sue you, even if it is without merit.

Maybe a little bit of an increase in deductible can keep the carriers healthier, keep your clients more stable, and have the premiums be more stable in the future. I think retention is an area to work with.