Intuitive Insurance Articles

The evolving landscape of Management Liability Insurance

A recent uptick in the severity and frequency of Management Liability Insurance claims has resulted in some significant industry-wide changes to these policies. Many insurers are looking to increase premiums and deductibles, while restricting cover and limiting their exposures. Not only will these changes impact new policies, they are even being applied on renewal, altering cover that may have been in place for a significant length of time.

The most notable and business-critical change is insurance companies’ growing reluctance to include cover for securities claims, which is particularly important for start-up companies and those that require ongoing cash injections.

Virtually all Management Liability policies for privately-owned companies include a “securities claim exclusion”. The language of this exclusion varies from insurer to insurer, but is generally worded to eliminate coverage for claims that allege a breach of securities laws for the public trading and/or offering of securities. These exclusions have now been broadened of late to also include private offerings.

Securities claims broadly refer to any actions brought by or on behalf of a shareholder of a company for violation of securities laws in connection with the purchase or sale or offer to purchase or sell securities of that company. There are two main types of shareholder suits, those that allege a breach of duty to a shareholder (direct) or those that allege a breach of duty to the company (derivative).

As an example, a direct claim could allege that the information about the company was misrepresented at the time an offer to purchase shares was made. A derivative claim would likely allege mismanagement and assert there was a conflict of interest and the director/s actions and decisions were made for personal reasons, and not for the overall benefit of the corporation and all of its shareholders.

In addition to shareholder initiated actions, in some instances regulatory and criminal investigations may be pursued regarding securities violations resulting in litigation.

Much of the mainstream business press reports on securities litigation that involves public companies, a huge exposure for listed firms. Private companies, who are not subject to ongoing disclosure requirements or the attention of litigation funders, do not have the same level of exposure. This does not mean that private company directors are by any means insulated from suits by shareholders.

While you would not expect private company D&O to cover public securities offerings, it would be reasonable to assume that your Management Liability insurance would respond to shareholder-related claims. You might be alarmed to discover that exclusions relating to private raisings exist in the first place, but even more so when you realise the restriction applies to the policy as a whole, meaning both the company balance sheet and your personal assets are potentially exposed.

This is a very real exposure, highlighted by the insurance markets response to coverage (i.e. by removing it). As noted, the limitation is not restricted to new policies and can even occur on renewal. The real concern here is these policies are offered on a claims-made basis, meaning the policy active at the time a claim made against you is the one which will respond, not the policy in place when the wrongful act occurred. If the replacement policy contains a private securities exclusion you will not be covered for shareholder claims for any past offerings, irrespective of whether the cover was included when you first took out the policy.

Changes to Management Liability are a timely reminder to review your coverage from year to year, and not just when the policy is taken out. Your business changes and so do the insurance policies covering it. What may have been appropriate previously, may not provide the level of protection you require going forward.

The insurance companies that have removed coverage do offer the opportunity to write back cover. They do this by specifically noting the offer document used to raise capital. This will pick up claims directly relating to that offer document, but it is not clear if claims arising from the offering related activities are also insured. Problems associated with the offering might have nothing to do with the document itself and the information it contains.

Despite these changes, there remains a lot of capacity in the market and insurers that are willing to offer securities cover on a blanket basis. This is not a commodity product so it is important for buyers to engage an insurance advisor who has the required knowledge and expertise. This will ensure a policy is recommended which is suited to the company’s needs, representing best coverage and pricing available.

While the focus of this article has been on changes for those companies raising capital, it is not to say that closely held companies should not consider Management Liability Insurance. Plaintiffs in D&O claims can include a much broader array of claimants than just shareholders, and commonly include customers, suppliers, competitors, regulators, and creditors to name a few. D&O claims may not happen frequently in the life of a company. If they do happen, these disputes are never anticipated, and D&O related events are very costly.

If you would like more information, please drop us a comment, email or call Intuitive on (02) 9493 6111.

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