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Pacific Gas & Electric Co.’s unfolding Chapter 11 bankruptcy, triggered by its potential liability for the 2018 and 2017 California wildfires, highlights a concerning trend for directors and officers liability insurers: the rise of “event-driven” securities lawsuits.
Risk managers should be taking a close look at their D&O coverage to ensure their companies are adequately protected in the event of bankruptcy and need to be prepared to possibly pay more for the coverage and retain more of the risk, experts say.
“When you talk about PG&E and why they filed for bankruptcy, really the larger matter at hand from a D&O insurer perspective is the onset and heightened level of event-driven litigation,” said Laura F. Coppola, New York-based regional head of financial lines, North America, with Allianz Global Corporate & Specialty SE, adding this trend is becoming “increasingly alarming” for the D&O market.
The D&O insurance market is being hit directly because PG&E’s bankruptcy is a result of the California wildfires, said Ms. Coppola. “Had PG&E not been implicated for those wildfires, (the company) probably wouldn’t have filed for bankruptcy. That one specific event created that bankruptcy filing for PG&E,” she said.
PG&E is facing securities class action litigation from shareholders alleging it made misleading statements regarding its wildfire safety practices and related to its involvement in the 2018, 2017 and earlier wildfires. The company also faces lawsuits from property owners and some insurers alleging that poor upkeep of its transmission lines caused the 2018 fires.
No fewer than 121 liability and property insurance policies, including 23 excess liability insurance and reinsurance policies that were in place at the time of the November 2018 California wildfires, were listed in a standard court motion to maintain insurance filed by PG&E as part of the Jan. 29 bankruptcy protection.
D&O liability insurers for PG&E, per the court motion, include ACE American Insurance Co.; Allianz Global Risks; Argonaut Insurance Co.; industry mutual insurers Associated Electric & Gas Insurance Services Ltd. based in East Rutherford, New Jersey, and Tampa, Florida-based Energy Insurance Mutual Ltd., both of which PG&E is a member; Berkeley Insurance Co.; Endurance Risk Solutions Assurance Co.; Houston Casualty Co.; North American Specialty Insurance Co.; Starr Indemnity & Liability Co.; Twin City Fire Insurance Co., as well as Lloyd’s syndicates Barbican, Hiscox (Alpha) and Munich Re at Lloyd’s.
Event-driven claims are one of the “biggest trends” in the D&O space, said Rob Yellen, New York-based executive vice president of Willis Towers Watson PLC’s FINEX North America practice.
“An event-driven case could be something related to a cyber breach, it could be something that arises from one of the #MeToo-type situations,” said Mr. Yellen. “It’s also possible in an event-driven claim that the reason we are seeing the securities claim, the class action or the derivative claim this year is because something on social media went viral.”
California wildfires are also an example of event-driven claims, said Mr. Yellen. “It’s a trend in our industry, and this fits the bill,” he said.
Emerging trends such as the #MeToo movement, cyber risks and a proliferation of class action lawsuits are creating a landscape that is hard to price and underwrite, according to a recent report on the D&O market from A.M. Best Co. Inc.
“The sizable increase in federal securities class action lawsuits over the past few years has revealed a specific area requiring expert risk management from insurers of D&O coverage,” according to a report by the Oldwick, New Jersey-based rating agency.
In such an environment, buyers of D&O insurance need to be prepared to pay higher prices for coverage and take greater self-insured retentions, depending on a company’s individual exposures and risk characteristics, industry observers say.
For companies buying D&O coverage, rates are on an “upward trajectory” and self-insured retentions are “increasing,” said Ms. Coppola.
By how much depends on different risk variables such as company size, industry, geography and different securities class action trends, she said.
On the primary side, rates are hardening, retentions are going up and terms are tightening, said Paul King, Dallas-based senior vice president and national technical director of executive and professional solutions for USI Insurance Services LLC. “Underwriting is actually happening again. The market is changing.”
The legal issues that arise when a company files for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code are complex and can create some uncertainty as to the extent of coverage available to both the entity and the directors and officers of the company, according to industry experts.