Canadian Underwriter

What’s driving D&O rate increases for privately-held firms

September 11, 2020   by Greg Meckbach

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Lawsuits from employees alleging harassment or discrimination is one reason for significant price increases in directors’ and officers’ liability rates.

In Canada, commercial brokerage Gallagher is seeing an uptick in age and gender discrimination claims and workplace harassment claims under D&O policies for privately-held insureds, said Dan Lewis, Gallagher’s management liability practice leader for Canada, in a recent interview.

“It is more of a frequency issue than a severity issue,” Lewis said of losses in D&O lines for privately-held clients. “We are not talking a lot of million-dollar claims here but we are talking about a Canadian employee base that is much more aware of their workplace rights and much more willing to bring litigation against their companies and that has a real impact on private D&O results.”

By contrast, D&O rates for publicly-traded firms are driven more by lawsuits from shareholders against directors and officers after a significant drop in the share price. In those cases, shareholders tend to allege the firm at one point misrepresented its true financial state.

“D&O rates for publicly-traded firms have been going up the past two years but rates for D&O for privately held insureds had not changed until more recently. Now, rates are going up for D&O for privately-held businesses and non-profits,” said Lewis. “The underwriting profitability in that book of business has eroded and it has created a real need for rate increases. A big driver is employment practices claims.”

For a large, publicly-traded client, there is normally no employment practices liability coverage on the D&O liability policy itself, said Lewis.

On the other hand, D&O policies tend to be very broad for privately-held firms and non-profits.

“That includes full employment practices coverage and full coverage for the entity, meaning the D&O liability policy responds even if no directors or officers are named in the underlying lawsuit. So for a harassment lawsuit from an employee, for example, this could be covered under the employment practices wording of a D&O policy. The individual director or officer might not be a named defendant unless it was alleged that the director or officer was perpetrating the harassment.”

Employment practices lawsuits against privately-held clients could also include allegations that a severance package should have been higher in the case of an employee who is dismissed without cause — for example, if an employer only gives the notice or severance required by the provincial employment standards legislation but not more, said Lewis.

As an example, he cited, as a possible scenario, a 62-year-old employee who is terminated without cause but only gets the minimum notice period specified in employment standards legislation. If that dismissed employee were to sue, the severity of the liability claim could depend on factors such as:

  • The chances that the employee can find similar employment at that age and at that seniority level; and
  • If the employer had induced the employee to leave a senior job for a competitor, only to dismiss that same person without cause a few years later.

Factors like those make it likely a court or tribunal would award the dismissed employee a larger severance (compared to the mandatory minimum under the provincial employment standards legislation) based on those contributing factors, said Lewis.

That can affect the size of the award and whether or not the D&O policy pays out, if severance coverage is provided in the employment contract.


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