D&O insurance rates, legal cases on the rise in San Francisco Bay Area amid more legal action

The type of insurance designed to protect white-collar executives is requiring more green to secure, experts say.

“D&O” insurance provides liability protection to directors and officers of a company by indemnifying them of responsibility in the event the insured company suffers from a legal loss.

Attorney David Goodwin, who practices law at Covington and Burling in San Francisco, estimated that rates have increased by 30% from 2019 to 2020. That’s a doubling of the prior year’s rise. The number of claims appears to be coinciding with the rising rates.

Rates are climbing as a result of carriers’ paying out more claims. Some are even becoming reluctant to sell the unique type of insurance.

Goodwin, who specializes in commercial coverage representing policyholders, says that’s made coverage harder to get. More than 20 carriers who manage the specific coverage exist in the San Francisco Bay Area, with most not based in the region. An estimated 50 insurance companies carry it across the nation.

“In all fairness to the industry, (the carriers) are trying to make up for money they’ve had to pay on significant claims. And many clients are seeing significant increases in premiums,” he told the Business Journal.

The uptick in rates places added pressure on companies who supply it for their top executives. This type of insurance is expected to be written into employment contracts and bylaws.

“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, which is headquartered in San Mateo with offices in Petaluma, said the boost in rate increases is not necessarily because of COVID.

“The rates are based on the loss of carriers,” said Wood, an insurance broker with 15 years of experience in the industry.

Companies may need to indemnify its executives for a variety of reasons. With private companies, D&O insurance often involves coverage for wrongful termination cases. With public corporations, fiduciary breaches are common. For both, executive misconduct is also a factor.

In Wood’s eyes, one of the most egregious cases involved a Wells Fargo scandal in which managers pressured bank employees to create fake accounts to inflate their sales numbers. The case brought by the bank’s customers settled four years ago for over $100 million.

Because of such high-profile cases that lead to major payouts to victims, premium prices can swing widely depending on whether a company is private or public and how large it is. As an example, a private company with about 100 employees may spend roughly $50,000 on annual premiums. A large public company such as Pacific Gas & Electric may have to shell out “multi millions,” Wood pointed out.

Counting on holding top execs accountable

The utility giant may see those premiums being used as it negotiates the firestorm of lawsuits thrown its way as a result of Northern California’s surge in wildfires in the last four years.

Its top executives are facing one such suit filed Feb. 24 in San Francisco Superior Court against 22 former executives, who the complaint alleges were responsible for their role in causing the 2017 North Bay blazes including the Tubbs Fire as well as the 2018 Camp Fire inferno. The fire victim lawsuit led by Trustee John Trotter accuses the terminated defendants with “breach of their fiduciary duties to act in the best interests of PG&E.”

In those two years, more than 100 people were killed and thousands of homes were damaged or destroyed.

“It is our duty to hold accountable the prior officers and directors who grossly neglected to do their jobs in the lead-up to the North Bay fires and the Camp Fire,” Trotter said in a statement.

The Camp Fire mowed down the town of Paradise after a century-old “C-hook” equipment at a transmission tower along the Feather River failed to stabilize power lines in the wind. In the North Bay, the utility company had not installed a power shutoff system.

The fire victim trust stands to gain at least $200 million from the suit, which may recover the funds from the policy.

“They had known about the company’s exposure. They were more concerned with the bottom line,” Cotchett Pitre & McCarthy Attorney Mark C. Molumphy told the Business Journal. “It was a recipe for disaster.”

A perfect storm

Beyond rising rates, other auxiliary expenses have to be paid by the insured when the claim involves a lawsuit, according to Tom Griffith, senior vice president of Don Ramatici Insurance, a brokerage firm in Petaluma.

“We’re certainly seeing a hardening of the market driven by the frequency of the claims and severity of the claims due to litigation costs,” he said.

And beyond the high-profile PG&E fire victim trust case as an example, much of the increase in costs and litigation is due to a growing number of cases spun out of the “Me Too Movement” in addition to the more commonly known fiduciary breaches.

Because these types of cases are on the rise, top executives are even more diligent to ensure their companies have this type of coverage.

“Today, it’s one of the first questions anyone asks — to what degree are you protected?” Griffith said.

A snowball effect

And as costs go up, actuaries track the trends in the market, leading to the number of carriers opting to bow out of selling it.

“It’s not just the payouts that make the rates rise. It could be just the heightened frequency (can cause that). They have to offset costs,” said Jeff Okrepkie of the George Peterson Insurance Agency based in Santa Rosa.

The broker has noticed the past year has brought on elevated tense situations — in the workplace and beyond.

“Any accusation of one or more officers failing to do their jobs can lead to the claims we’re seeing,” he said. “Emotions are heightened.”

One Bay Area insurance company is calling the market “distressed.”

According to Woodruff Sawyer’s Priya Cherian Huskins, who works in the insurance company’s San Francisco office as senior vice president in Management Liability, the firm recently conducted a report and found that “the rate of litigation is still elevated” from 2019 to 2020, Huskins wrote.

The report found securities class action lawsuits in the nation reached an all-time high to 268 in 2019 and remains elevated to 210 in 2020. As a comparison, there were 141 in 2011.

Moreover, Huskins indicated “more troubling” is how many are “unresolved cases” that carriers are facing.

“Carriers are concerned about how these losses will impact (them),” she wrote.

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