Are D&O insurers considering heightened EPL exposure in the current environment?
D&O policies have offered individual EPL coverage for as long as memory serves. But why? Yes, D&O policies are ‘all-risks policies’ but why would a director be happy to have their limit eroded by wrongful acts committed by any employee? And why are insurers happy to cover this exposure in the first place, when standalone EPL policies have been readily available for many years?
The likely answer is a simple one. EPL claims against individuals have never really been a problem to the D&O market before now. Firstly, because the frequency and severity of EPL claims outside of the US has – with the odd exception - been reasonably low,
and secondly because the majority of EPL claims are made against an entity and not an individual. Insurers therefore have been able to rely on ‘other insurance’ clauses pointing towards the more obvious standalone EPL policy to pick up these claims.
Change is in the air
Social movements including #metoo and #blacklivesmatter as well as a number of regulatory changes around the world have prompted a marked increase in both the frequency and severity of EPL claims in recent times. And that’s before the impact of COVID-19 and the subsequent global recession are taken into consideration. This combination of factors has seen the rapid withdrawal of EPL capacity from the London market with very few insurers – Beazley being one of them - willing to consider offering capacity on any level, especially primary.
For the D&O market this essentially means a heightened EPL claims environment and an increased likelihood that clients will look to their D&O insurers to cover these exposures. It’s therefore important that insurers at least consider the additional risk that they would be taking on.
The US EPL claims environment is still the most problematic, so as a starting point we need to consider how exposed our clients are in the US. If they are still able to purchase stand-alone EPL coverage we need to ascertain what limits they buy, and whether we need to review our forms to ensure we are not inadvertently offering an element of entity EPL coverage due to inadequate allocation language. This is particularly important as the majority of claims that may arise from large scale lay-offs during a recession, or due to the impact of COVID-19, will be aimed at the entity but could also name individual directors.
Logic would suggest the need to consider both specific and increased retentions in respect of EPL claims and the removal of individual EPL coverage entirely as options, depending on the risk in question.
In the current environment no-one wants to hear about additional problems, but it’s important for clients, brokers and insurers to acknowledge and have a conversation about this increased exposure and where it should be covered. The last thing the D&O market needs at the moment is a spate of losses it never intended to pick up.