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COVID worsens D&O crisis: Marsh

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Directors’ and officers’ (D&O) premiums will soar further, after surging in the first quarter, as the coronavirus pandemic worsens existing problems created by Australia’s class action environment, Marsh has warned.

“COVID-19 will continue to exacerbate the market hardening, with London capacity for Australian risks further withdrawing, and inevitably impact pricing for the balance of 2020,” the broker says in a submission. “We are once again seeing triple digit pricing increases.”

Marsh says the D&O market is in the midst of a perfect storm marked by greater and unprecedented risk, higher premiums, lesser and more onerous coverage, punitive retentions and historically lower limits.

The level of securities class actions is creating major issues and a hardening market is likely to continue in Australia and globally over the next 12-18 months.

“Corporate Australia could face a future in which D&O insurance is no longer available or affordable or provides the coverage expected or required,” it says.

The submission to the Parliamentary Joint Committee on Corporations and Financial Services inquiry into litigation funding and the regulation of the class action industry notes company directors are potentially exposed to liability under more than 600 pieces of legislation.

The broker’s data shows the average D&O insurance increase in the first quarter was 225% with some premiums rising as much as 400-500% for the biggest ASX listed companies.

Marsh says insurers having withdrawn from providing D&O securities cover to ASX-listed companies include WR Berkley, Vero, Allianz, Talbot Australia and Lloyd’s syndicates Novae, Neon, Canopius, Pioneer, Axis and Acapella.

Others including Axa XL, Zurich, Chubb, Liberty, Dual Australia and London Australia Underwriting have reassessed their exposures and become more discriminating.

Broad-form COVID-19 exclusions have also been foreshadowed in a response that recalls moves to ring-fence exposures arising from the Hayne royal commission.

“We anticipate resisting, let alone amending the language of these exclusions will become more challenging and, as was the case with the royal commission exclusion, ultimately non-negotiable,” Marsh says.

The Risk Insurance Management Society (RIMS) says the class action environment fails to achieve the right balance between access to justice and the ability of corporate Australia to function effectively.

“Going forward corporations will likely have significant uninsured exposure to defence costs and settlements, or judgments, which will ultimately impact their returns to existing shareholders,” it says.

RIMS suggests possible improvements could include companies having to meet American-style “periodic disclosure” obligations rather than current continuous disclosure rules.

The Australian Institute of Company directors (AICD) says the adverse effect of class actions on D&O cover extends widely given the limited pool of capital in the insurance class.

“Impacts are not limited to listed companies, with private companies, SMEs, not-for-profits and charities all impacted as insurers are seeking to remediate their entire D&O insurance portfolios,” it says.

“While it is difficult to know if the COVID-19 crisis will directly result in higher D&O insurance costs, as prices were expected to rise in any event, it is bringing further stress to a market already hardening and in crisis.”

The AICD says the Australian Securities and Investments Commission should be responsible for overseeing continuous disclosure rules, and be able to seek compensation for shareholders harmed by breaches, with private actions prohibited.

“There is a legitimate question to be asked as to why private actions, selected by lawyers and funders based on commercial not public interest imperatives, are needed to enforce continuous disclosure laws,” it says.

The parliamentary committee is scheduled to hold public hearings next month and will release its report by December 7.