4 Tips to Secure D&O Coverage in Uncertain Economic Times

4 Tips to Secure D&O Coverage in Uncertain Economic Times

The best preparation is early preparation, given the current state of the market. Here’s some advice on how to build your D&O program and information about executive liability.

By Greg Boornazian, Christie Vu and Ben Young

Small and medium-sized businesses may face even greater risk for financial impairment in the coming months due to the reduced availability of credit, interest rate increases and the tightening of lending guidelines. With the current state of the market, now is the best time to review your organization’s Directors & Officers (D&O) insurance with your broker to determine if your organization and executives are adequately protected in the event a financial impairment does occur. To help prepare you for coverage negotiations with your insurer, here are a few considerations that underwriters will look for when evaluating companies for D&O coverage:    

4 D&O Placement Tips from the Underwriting Perspective

1. Start early.

Reviewing your D&O insurance program with your broker as early as possible before any potential bankruptcy provides you with the ability to design a program to protect your company and directors and officers in the event a bankruptcy does occur. This allows for better opportunities in the negotiation process for favorable coverage. The closer the company heads to financial impairment, the less likely an insurer will enhance any policy terms or conditions. 

2. Be upfront about the organization’s challenges and strategy.

Underwriters perform an individual risk assessment on the company and look at the macro environment in general, such as market conditions, political changes, segment bubbles and court decisions. While each risk is unique, underwriters manage a book of business with many homogenous groupings. It’s likely your strategic themes will be similar to other risks they have reviewed. Specific details about your funding strategy, profitability plans, unique business model or geographic strengths in your particular segment can make a difference.

Treat your underwriters like they are potential investors in your company. Market conditions for underwriters harden and soften in cycles too so they may be understanding and open to learning how interest rate hikes, high-profile bankruptcies, pandemic-related securities cases, supply chain issues or staffing challenges may impact your company.

Be prepared to answer the following questions that underwriters may ask:

  • Have there been any operational changes? Examples include: any exit from product lines or geographic areas, any downsizing, divestiture or “cash conservation” strategies being implemented, or any past management strategies resulting in an unmanageable risk burden or persistent net losses. 
  • Have you engaged with any third party turn around specialists?
  • Has there been any one-time write-down requirements or other accounting change implementations, including a change in auditor?

3. Meet in person or virtually with underwriters

Addressing potential underwriter concerns may facilitate a smoother D&O placement when conditions are at risk of deteriorating. Relationships matter and with new capacity in the market there are several experienced underwriting teams interested in getting to know more about your risk and reestablishing or forging new relationships with your executive teams. Underwriters who spend time with management to understand the cycles of a given business or strategies to combat threats to profitability may be more agreeable to offer capacity.

4. Elevate the discussion

Include your own experts in the discussion. Chief financial officers, risk managers and general counsel are well suited to best connect with underwriters and add color to the conversation on the spot.

Underwriters prepare for these meetings and will want to engage at a meaningful level to help differentiate your risk from others based on more detail than can be gleaned from an application. By sharing the most recent audited financial statements with notes ahead of time, an underwriter will be able to drill down on certain facets of your company such as details regarding loan covenant defaults and waivers, cash burn coverage capability for the next 12-18 months, accounts receivable / accounts payable imbalances, long-term debt payment obligations, EBITDA and net income trends, and net loss explanations including reasons such as depreciation versus interest expense. 

Also, prepare interim and pro forma information to support management’s thesis. These are critical underwriting details that create a more complete financial picture of the company. 

These are just a few examples of what underwriters are looking to understand when evaluating the financial health of the company but addressing them directly may be conducive to better terms overall. For more advice on how to build your D&O program and to learn more about executive liability, B&B Protector Plans. For more information on what your D&O policy should include ahead of bankruptcy, read Part I of this series.

This information is intended for informational purposes only. Protector Plans Executive Liability is not liable for any loss or damage arising out of or in connection with the use of this information.

10 D&O Policy Considerations Ahead of a Potential Bankruptcy or Insolvency

10 D&O Policy Considerations Ahead of a Potential Bankruptcy or Insolvency

It’s smart to prepare for risks such as bankruptcy in these uncertain economic times. But, how? Here we share D&O policy considerations ahead of a potential insolvency.

By Greg Boornazian, Christie Vu and Ben Young

The U.S. Federal Reserve’s current push to slow down the U.S. economy is threatening to send the country into a recession[1], putting privately held companies at greater risk for bankruptcy due to their inability to pay down debt and the rising costs of borrowing funds.

Small and medium-sized businesses may face even greater refinancing risk in the coming months due to the reduced availability of credit, interest rate increases and the tightening of lending guidelines.

In the first quarter of 2023 alone, overall commercial bankruptcies increased 19% compared to the first quarter of 2022.[2] With the expiration of most COVID relief programs, such as the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, and rate increases by the U.S. Federal Reserve, more bankruptcies may be on the horizon.[3]

To help protect against these potential risks, organizations can rely on their Directors and Officers (D&O) liability insurance to safeguard their teammates and their business.

D&O insurance helps protect a company’s bottom line and the personal assets of their corporate executives — past, present and future — against lawsuits brought by shareholders or other parties, including employees, regulators, creditors, vendors, customers and competitors, for their decisions and actions in managing a private company. Coverage is typically for:

  • Defense costs
  • Judgments
  • Settlements 

D&O Policy Coverage Considerations

Because of the state of the economy today, now is the time for you to evaluate your organization’s D&O policy coverage to ensure you are protected in the event of a bankruptcy or other financial insolvency by reviewing the terms, conditions and limits against your current expected operating environments and bankruptcy ruling trends with your broker.

Here are 10 coverage considerations to keep in mind:

1. Debtor-in-possession: In a bankruptcy, typically the company’s current management team stays in place to continue operating the company and is referred to as the “debtor-in-possession.”[4] Your D&O policy should include “debtor-in-possession” as part of its definition of an Insured so that coverage continues.

2. Insured vs. insured exclusion: This provision protects the insurer from providing coverage for collusion and internal disputes between insured parties by excluding coverage for any claim brought by or on behalf of an insured against another insured on the same policy. Ensure the exclusion in your policy includes a carve-back stating that the exclusion does not apply in the event a claim is brought in a bankruptcy proceeding — or some other similar wording — so that the policy provides coverage for any claims brought by a bankruptcy trustee.

3. Conduct exclusion: The actions of your D&Os will likely be scrutinized if a bankruptcy occurs and triggers your policy’s conduct exclusion. For example, a bankruptcy trustee may claim that its D&Os committed fraud, which led to the company’s bankruptcy. Since conduct exclusion language differs across insurers, make sure to:

  • Carefully read the language in your policy to ensure it advances defense protection to the D&Os.
  • Include a requirement that the exclusion applies only if a final, non-appealable judgment against the insured D&O happens.
  • Review the final adjudication requirement in your policy to see if it’s based on “the” or “any” underlying proceeding, to determine how broad the exclusion applies.

4. Order of payment: Review your policy to determine how payments will be made if a bankruptcy occurs. This provision should indicate that payments first be made to the directors and officers to cover any costs not reimbursed by the company.

5. Side-A Coverage and Presumptive Indemnification: Once a bankruptcy proceeding is filed, the court suspends any litigation proceeding except for litigation against directors and officers.[5] As a result, your D&O’s Side-A policy could still be used by directors and officers since it protects them if the company can’t indemnify them.[6] Your D&O policy should include the following two provisions:

  • Any bankruptcy or insolvency issue your company faces does not absolve the insurer of its obligations under the policy.
  • The parties waive any automatic stay that may apply to any proceeds of the policy.

6. Side-B Coverage and Presumptive Indemnification: D&O policies typically include a presumptive indemnification provision stating that the insurer assumes that directors and officers are indemnified by the company to the fullest extent permitted by law.
Whereas Side-A coverage does not include a retention, Side-B coverage does, which is similar to a deductible. The difference: a retention requires the insured to pay for any costs up to the specified amount before the insurer begins to pay.

Some courts have found that D&O policy proceeds are part of the bankruptcy estate since it is corporate reimbursement coverage, not individual protection coverage.7 This could leave D&Os exposed since an automatic stay does not suspend any lawsuits made against them.  

TIP: Ensure your D&O policy includes carve-backs to the presumptive indemnification stating the insurer will pay any costs if the company refuses, is unable or fails to advance or indemnify its D&Os, without applying any retention, unless and until the company has agreed (voluntarily or by court order) to make these payments.

7. Run-Off Coverage. This covers directors and officers up to six years after a merger or acquisition occurs, and only covers actions that happened before the merger or acquisition. Ideally, the D&O policy should not include bankruptcy as a trigger for run-off coverage so the policy can support D&Os who have remained with the company to manage it through murky waters.  

TIP: Discuss terms and pricing with your underwriter in advance, as the quote for this coverage typically is not offered at renewal or when negotiations begin.

8. Wind-Down Coverage. Discuss the need for inclusion of wind down coverage with your broker, concurrent with run-off terms. This helps cover directors and officers while wind-down activities take place after the run-off coverage begins. Endorsements may specify coverage for actual or alleged wrongful acts committed by an insured in connection with the winding down of the business and operations.

TIP: Ask your broker about what the excess layers of your D&O program are offering in terms of pricing and coverage in the event of a run-off, as this coverage can be expensive.

9. Policy Period Extension. In Chapter 11 bankruptcies, a company is usually allowed to continue its business operations while restructuring its debt and working with an assigned committee to develop a reorganization plan.[7] Since D&O policies typically run annually, an extension to the policy period will likely be needed through expected emergence.

TIP: Confirm if your insurer is willing to offer an extension. In addition, ask about restrictions on policy period lengths due to reinsurance requirements. Also ask your broker if incumbent markets are likely to offer go-forward coverage or will a complete remarketing effort be required.

10. Additional D&O Limits. D&O policy liability limits are shared across your organization’s Side-A, Side-B and Side-C coverage. This D&O policy liability limits are shared across your organization’s Side-A, Side-B and Side-C coverage. This can leave directors and officers exposed if the limits have been used on claims to indemnify the company or other employees. To safeguard directors and officers from personal liability, additional limits can be purchased solely for your directors and officers in case the company cannot indemnify them. Here’s a short list of additional D&O limits to consider:

  • An additional limit for Side-A coverage that would apply once the D&O policy and any excess policy is exhausted. 
  • A difference-in-conditions policy. This standalone Side-A policy has few exclusions and may drop down in certain situations, including filling gaps when there are disputes between carriers and insureds.
  • An independent director’s liability (“IDL”) policy may be considered for additional protection. IDL policies are purchased by the individual and may be tailored for those who sit on multiple boards. It’s useful for high-net-worth individuals who serve on boards of small, start-up or non-profit operations whose operating history or financial scope may be limited.   

The above considerations highlight just a few of the ways a D&O policy can protect your directors and officers in the event of a bankruptcy. For more advice on how to build your D&O program and to learn more about executive liability, contact B&B Protector Plans.

For information on what underwriters are looking for in placing a D&O policy, read Part II of this article here.

This information is intended for informational purposes only. Protector Plans Executive Liability is not liable for any loss or damage arising out of or in connection with the use of this information.

[1] CNBC “No exit ramp for Fed’s Powell until he creates a recession, economist says,” March 8, 2023.

[2] Epiq “Bankruptcy Filings Increase All Chapters in March; Commercial Filings Up 79 Percent Year-Over-Year,” April 3, 2023. 

[3] S&P Global Market Intelligence “US corporate bankruptcy filings hit 12-year high in first 2 months of 2023,” March 3, 2023.

[4] United States Courts “Chapter 11 – Bankruptcy Basics.” 

[5] Rivkin Radler “The Reach of the Automatic Stay in Bankruptcy: Far, But Not That Far,” December 10, 2015.  

[6] American Bar Association. “Whose Policy is It, Anyway? A Debtor’s Insurance Policies and Rights to Policy Proceeds,” December 14, 2014.

[7] Houston Chronicle “What is the Difference Between Liquidation and Emergency in Bankruptcy?

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Are your excess limits sufficient for 2023?

Are your excess limits sufficient for 2023?

With the unsteadiness of the current economy, it’s more important than ever for companies to think about the adequacy of their management liability insurance limits.

Economic headwinds such as inflation and interest rate volatility, supply chain disruptions, labor shortages and changes in the global political climate may all be potential factors leading to an increase in frequency or severity of management liability claims. CEOs, CFOs and risk managers need to ask themselves, “Are we buying enough limits in this economic environment?”

Companies in distress are often aware of their potential exposures, but even healthy companies with growing revenue and a strong employee and customer base may want to re-evaluate excess insurance limits during these uncertain times.

6 exposures that necessitate revisiting your excess coverage

Consider the following six risk exposures that may affect your company — and your excess coverage needs — in 2023:

1. Employment costs

Compensation costs for private industry workers have been on the rise for years, with a 4.4% increase in 2021 and another 5.1% by the end of 2022.[1] At the same time, benefit costs increased a total of 7.7% during the same period.1 This cost creep will have an effect on any organization’s bottom line.

2. Downsizing

If your business is looking to downsize as a cost reduction strategy, allegations of discrimination, retaliation, or wrongful termination and possibly class action suits may arise. With remote work, “single site work environments” are becoming somewhat of a moving target definition, subject to court interpretation. Lawsuits are expensive and potentially damaging to the brand; Having excess limits in place may help mitigate the impact of EPL related lawsuits.     

3. Rising defense costs outpace inflation

Prices for legal services are 305.21% higher than in 1986, with an average inflation rate of 3.92% per year — higher than the average yearly inflation rate of 2.75% during the same period.[2] This trend, on top of the current inflationary environment, means it is more important than ever to make sure you have adequate limits to transfer risk. With prices rising, excess limits should as well.

4. Enforcement trends of the Equal Employment Opportunity Commission (EEOC)

The Biden administration has increased staffing and budget allocations at the EEOC[3] and made enforcing EEOC Right to Sue letters a new focus.

Class action EPL claims make up a significant portion of employment discrimination suits. In 2020, EPL suits had the highest settlement amounts of any class action litigation at $422.68 million.[4] The EEOC’s 2021 expansion of the use of virtual mediation led to $176.6 million in recovery to claimants, $20 million more than 2020.[5]

The White House’s renewed expansion of the EEOC means more employment-related charges in the near future. Businesses who haven’t increased excess EPL limits could be in danger as the EEOC’s concentration on this space continues.

5. Increased fee litigation for retirement plans

In the past, fiduciary coverage for 401(k) plans was not a hot topic. Fiduciary coverage has historically been relatively inexpensive with a nominal retention. After a recent period of double-digit investment loss, fees associated with the administration of defined contribution plans have come under additional scrutiny initially by employees of large healthcare and educational institutions.

Fiduciary liability saw significant claims and subsequent losses in 2021, which disrupted multiple insurance segments.[6] Plaintiff firms are doggedly following fee and expense claims and have received large settlements across an increasing array of markets and industries. This squarely puts adequate fiduciary coverage back on the radar of risk management teams.

6. Risks around M&A.

M&A growth is expected this year,[7] with many analysts suggesting Q3 2023 may be an inflection point. Once the interest rate environment stabilizes, companies are likely to seek out traditional M&A targets to acquire expertise they don’t currently have in house or to further expand their footprint geographically. This can bring about changes in management, shareholder disputes, employee turnover, regulatory issues and countless other considerations that could lead to allegations of wrongful acts.  

Your company may be a target for an M&A — even without your knowledge — making it essential that you have considered adequate limits before a transaction is initiated. Unfortunately, such coverage may not be readily available to a company mid-transaction. 

Whether you are the target or acquirer, management liability limits are essential.

Right sizing your risk

Insureds may benefit from refreshing their consideration of limits adequacy amongst a myriad of factors. Limits may experience more rapid erosion in the current environment than they ever have in the past.

Excess insurance policies are one way to mitigate this growing risk.

To learn more about how to manage management liability insurance-related risks, contact us today.

This information is intended for informational purposes only. Protector Plans Executive Liability is not liable for any loss or damage arising out of or in connection with the use of this information.

[1] U.S. Bureau of Labor Statistics “Employment Cost Index Summary,” January 31, 2023.

[2] Official Data Foundation “Prices for Legal Services, 1986-2023,” Accessed February 15, 2023.

[3] Business Insurance “EEOC funding would increase 10.6% under proposed 2023 budget,” March 29, 2022.

[4] Seyfarth “17th Annual Workplace Class Action Litigation Report,” January 2021.

[5] The National Law Review “EEOC Roundup: Top 5 Takeaways for Employers on the 2021 Enforcement and Litigation Statistics,” April 7, 2022.

[6] Willis Towers Watson “Fiduciary liability: 2021 in review and a look ahead to 2022,” January 4, 2022.

[7] PwC “Global M&A Industry Trends: 2023 Outlook,” January 2023.