Specialty Podcast: Recent Rulings and Their Ongoing Effect on the Insurance Market

Intro (00:00):
You're listening to the Alliant Specialty Podcast, dedicated to insurance and risk management solutions and trends shaping the market today.

David Finz (00:09):
Well, hello everyone and welcome to another edition of the Alliant Specialty Podcast. I'm David Finz and with me in the studio today is our Financial Lines Product and Thought Leader, Matia Marks. Matia, thank you for joining us once again.

Matia Marks (00:24):
Thanks for having me, David.

David Finz (00:26):
So, Matia, I understand that one of your favorite topics, related claims, was the headlining news story for the December issue of our Executive Liability Insights with a twist involving an excess insurer. Would you care to enlighten our listeners about what happened in this coverage litigation?

Matia Marks (00:45):
Sure, David, I'd be happy to. While this was a disappointing result out of a North Carolina District Court, it underscores several important points that I focus on daily in my role here at Alliant. Which are number one, to make sure that excess policies really are as true follow form as possible. And number two, to be sure to clarify policy wording when it comes to the definition of interrelated claims or interrelated wrongful acts. And in the case, you're referring to, the insured had a tower of insurance, which included a primary layer and four excess layers of insurance. And in year one of the program, the tower was providing coverage for several class action lawsuits stemming from the insured's alleged anti-competitive behavior. In year two of the program, the insured provided notice of a securities class action claim, which involved allegations that the company misled investors by falsely attributing the source of their financial success to legitimate and lawful pricing strategies rather than alleged anti-competitive conduct. This claim was eventually settled and then the insured sought coverage under its D&O tower for the settlement amounts. And in addition to this new claim being filed in year two of the program, in that same policy year, the fourth excess insurer on the tower was replaced by another insurer. And while this layer reported to be what we call a true follow form excess policy, it actually contained two additional exclusions which the insurer relied on to deny coverage even after the underlying carriers had paid all their limits.

David Finz (02:22):
That's interesting, Matia. So, what were the additional exclusions that the new excess carrier placed on the policy and how did that affect the coverage for the securities litigation?

Matia Marks (02:33):
Well, first there was a proceeding, claims exclusion, which I'd like to focus on. This exclusion provided that the policy only afforded coverage for claims, securities claims and derivative suits against the insured, first made during the policy period. Additionally, the new excess policy contained a prior notice exclusion, which the court didn't really discuss in much detail.

David Finz (02:56):
Okay, well hang on a minute then. The proceeding claims exclusion doesn't seem like it's out of left field though, given that management liability policies are typically claims made in reported policies. Isn't that, right?

Matia Marks (03:08):
Yeah, that's true David, but the problem here arose because of the way that several other policy provisions were applied to the proceeding claim exclusion. Specifically, there was a provision in the policy which stated that all claims for either the same wrongful act, any interrelated wrongful acts or the same or related wrongful acts will be treated as a single claim, first made on the earliest date that any of such claims were commenced or notice of any of such wrongful acts in a related wrongful act or fact or circumstance was given under any prior management liability or similar insurance policy. And as you can tell, this is extremely broad wording. Furthermore, the policy defined interrelated wrongful acts as wrongful acts that have, as a common nexus, any fact, circumstance, situation, event, transaction, cause or series of causally connected facts, circumstance, situations, events, transactions, or causes.

David Finz (04:06):
Okay, well that's interesting, but what exactly is a common nexus?

Matia Marks (04:10):
Well, you hit the nail right on the head, David. That's my beef with the court's decision in this case. The court takes a look at this exclusion and determined that the claims and I quote, "comfortably fit within the common definitions of claims for interrelated wrongful acts", and therefore determined that the preceding claim exclusion was unambiguous. However, it never provided an explanation of what common nexus means and simply concluded that this definition had been satisfied, based on conclusory allegations of a common scheme as well as a common cast of characters. I don't know about you, but I don't find there to be anything comfortable about this conclusion, given that it was based on pleadings alone and not a final adjudication of wrongful conduct.

David Finz (04:49):
Now that is pretty confusing, Matia. So how would you have gone about amending the policy wording to make this issue clearer for insurance buyers?

Matia Marks (04:57):
Yeah, well, I don't want to give away our secret sauce here, but I'll tell you that there's definitely better language out there that Alliant brokers are able to negotiate, when it comes to the definition of interrelated wrongful acts. And additionally, it's important for insurance buyers to understand how each layer in their insurance tower will respond to a claim and to question when there are additional exclusions placed on excess policies. Making them not exactly true follow form. Inconsistent coverage positions throughout a tower is definitely not something we like to see.

David Finz (05:27):
No, that's a great lesson, Matia, and not just in the D&O space, so thanks for that.

Matia Marks (05:32):
Sure, my pleasure. So, turning now to cyber, which I know is your favorite topic, I understand that there's a report out there from the National Association of Insurance Commissioners on the state of the cyber insurance market. What can you tell our listeners about that?

David Finz (05:45):
Yeah, thanks, Matia. So, the NAIC recently issued its annual report on cyber insurance based upon data it compiled from the leading markets for this coverage. The NAIC looked at the growth of the market year over year in terms of premium, but also with the loss ratios reported by the carriers, which are considered a measure of insurance carrier profitability.

Matia Marks (06:10):
Interesting, and what were the findings there?

David Finz (06:12):
Well, there's been a slight improvement in the carrier loss ratios from the prior year. Underwriters measure the profitability of their book of business, as the ratio of losses they have paid out relative to the premium that they've taken in. Now, because of overhead, commission to brokers and other expenses, insurers typically try to keep this ratio below 60% or at most 65%. In 2021, the loss ratio for the top 20 cyber insurers decreased from 66.9% to 66.4%. I know this may not seem like much of a change, but you know, there were some pundits out there who have been sounding the death nail for cyber insurance. So, any improvement is welcome.

Matia Marks (06:55):
So, was the performance of individual carriers pretty consistent across the marketplace then?

David Finz (07:01):
Actually, no. When you drill down to that level, it's even more revealing. According to the NAIC report, four of the top 10 insurers, and 10 of the top 20 were able to keep their loss ratios below that magic 60% threshold, which tells me that they have found a way to continue offering this important product to policy holders and to do so profitably. Now ironically, the two markets with the highest loss ratios, saw their rankings drop year over year as measured by premium volume. So, that tells me that shrinking your way to profitability doesn't seem to be the answer. And most of the markets that have chosen to grow their book rather than pull back, have been rewarded with healthy loss ratios.

Matia Marks (07:44):
That's interesting. So, to what do you attribute the improvements that some carriers are experiencing?

David Finz (07:50):
Well, I think it's because the underwriters have become more astute in offering this coverage and the NAIC report acknowledges this. They note that insurers are more thoroughly examining a company's security controls, their processes and procedures. Underwriters are also looking more closely at vendor management, since a sizable percentage of cyber claims are the result of security compromises that are not necessarily at the insureds network, but rather on the part of their service providers.

Matia Marks (08:19):
I'm sure that's part of it, but premiums have gone up, haven't they?

David Finz (08:23):
Yea no question. The NAIC report indicates, direct written premiums increased by 75% in 2021 from the year prior. Now, obviously some of that is attributable to adjustments in pricing. But we can't ignore the fact that the number of policies issued also increased by 31.8% year over year. So that tells me that cyber is a coverage that more and more businesses are recognizing they need and that insurers have become savvier about underwriting. We're talking about a $4.8B market for standalone coverage and $6.5B if you throw in the package policies.

Matia Marks (09:02):
Well, it sounds like cyber, interesting as it is, definitely isn't going away anytime soon. So, what can you tell our listeners about what Alliant is doing to help clients around this important line of coverage?

David Finz (09:13):
Well, glad you asked. As we recently announced on another podcast, Alliant has made substantial investments in talent so that we can serve as trusted cyber risk advisors. We want to help our clients position themselves in the best possible light before the underwriters, so that they can secure the broadest possible coverage at a fairly priced premium. And as you know, our specialty claims team is there to zealously advocate on their behalf, when they do experience a loss. So, you know, maybe that's a good note for us to end it on here. And you know, every month we have an Executive Liability Insights Newsletter, which touches upon these and other issues that are of interest to, you know, businesses of all industry types and sizes. So, if you'd like to see that content, you can visit our website www.alliant.com. Here at Alliant, we are all about helping our clients find the more rewarding way to manage risk. Thank you for listening. Until Next time, take care.