Turning the corner on D&O liability insurance

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Berkshire Hathaway Specialty Insurance has the local market knowledge and long-term commitment to assist companies in mitigating hazards that others may not fully understand

THE DIRECTORS AND OFFICERS liability insurance market in New Zealand seems to be emerging from a multiyear funk as more capacity enters while the risks for companies increase. The market has hardened significantly over the last four or five years – a trend partly exacerbated by the economic uncertainty during COVID-19 – but may now be turning the corner. “The market currently appears to be stabilising in terms of price increases, and after several years of ongoing restructuring of D&O programs due to changing underwriting appetites of carriers, and insurers leaving the market, most programs are able to be renewed as per their expiring structure,” says Ella Owen, senior underwriter for executive and professional at Berkshire Hathaway Specialty Insurance (BHSI) New Zealand.

Berkshire Hathaway Specialty Insurance (BHSI) New Zealand provides commercial property, mining and energy, construction, casualty, executive and professional lines, marine, transport and logistics liability, accident and health, healthcare liability, surety, and multinational solutions and risk engineering. BHSI’s wide range of insurance products is expanding; this is combined with financial strength, a yes-oriented culture and great flexibility in customising solutions for customers’ needs. BHSI is customer-first, through and through. It views every claim as an opportunity to strengthen its customer relationships and industry reputation because, as BHSI says, ‘Claims is our product’.

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“Claims activity is increasing as class actions for New Zealand companies increase and regulators ramp up actions post COVID-lockdown hiatuses”

Ella Owen, Berkshire Hathaway Specialty Insurance New Zealand

The end of the pandemic has given rise to two significant factors contributing to this dynamic – one is the return or entry of overseas players. More insurers entering the market is increasing competition in certain segments, leading to better profitability and a flattening of premium rates. “There is more available capacity in the NZ market than at this time last year, with offshore markets returning to write business in Australia and New Zealand,” Owen says. The other factor is less constraint around various legal actions, which is stimulating a flurry of claims.

“Claims activity is increasing as class actions for New Zealand companies increase and regulators ramp up actions post COVID-lockdown hiatuses.”

BHSI has a broad D&O policy wording, as well as management liability cover that also includes D&O. It has operated in New Zealand for nearly a decade now and sees its steady hand during turbulent times as a key asset. “Our hope is that our customers value their relationship with us and our commitment to them as an insurance partner, and continue to place their D&O insurance with us as an onshore insurer with local claims-handling support and expertise,” Owen says. Local knowledge is important to this proposition due to some peculiarities of the New Zealand market. Unlike many regimes abroad, the law in New Zealand effectively denies insured persons access to defence costs where the money may be subject to a third-party claim. The Court of Appeal ruling in the Steigrad v Bridgecorp* decision means that the rights of third-party claimants may trump the insured’s right as the policyholder to have defence costs covered if the combined claims might exceed the policy limit. If a D&O policy provides an aggregate policy limit to cover both defence costs and liability to the claimant, the insured may find their defence costs cover depleted. BHSI’s solution is to split related coverage into two parts. “Our standalone D&O product differs from our competitors most noticeably in the way that we address the need for separate loss and defence costs limit as a result of the Steigrad decision,” Owen says. “We provide two separate towers, one for loss and one defence costs. This provides certainty to our customers as to the amount of defence costs limit they have available for a claim, regardless of the size of the loss right from day one, and eliminates any confusion as to when the defence costs tower would apply over the main tower.” This solution is easy to talk through with customers and reduces delays at claims time stemming from allocation issues between the loss and defence costs towers – the size of the third-party claim is taken out of the equation. “Fines and penalties cover is an important aspect of cover that brokers are aware of in the current market environment, so the broad cover we provide in this space is appealing to brokers and customers alike.”

Class actions in New Zealand – group litigation that allows plaintiffs with common interests to prosecute claims they might otherwise be unable to – is an area that boards of directors need to be increasingly cognisant of as they become more common. This type of litigation is no longer unusual, and the potential magnitude of the risk is much greater due to the larger sizes of groups.

“As we don’t rely on reinsurance for our capacity, we are not forced to change premiums or terms based on the reinsurance requirements”

Ella Owen, Berkshire Hathaway Specialty Insurance New Zealand

This is especially relevant to publicly listed companies that face risks in relation to their continuous disclosure obligations, particularly as litigation funders turn more of their focus towards New Zealand than they did in the past. Class actions may be on the way to becoming even more entrenched as the Law Commission recommended last year establishing a Class Actions Act to codify the area, which would likely simplify the current law, making it easier for cases to be brought.

The government has also become more active in pursuing companies seen as failing to meet various standards since COVID waned. “We are currently seeing a marked uptick in regulatory action from the Commerce Commission in New Zealand, with new actions against companies in the media every week,” Owen says.

Knowing the local terrain

The economy and other risks affecting D&O

Legal actions gaining momentum

Published 17 Jul 2023

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Legal actions gaining momentum

Potential for more class action-type cases in New Zealand

Number of representative action cases allowed by the High Court where a person sues on behalf of other people who share the same interest in the subject matter:

46%

Source: Class Actions and Litigation Funding report, Law Commission, May 2022

The New Zealand experience of COVID-19 was unique, but the aftermath of inflation and rising interest rates is hurting a range of industries, especially those sectors such as hospitality that received significant support but now face declining consumer confidence due to the higher cost of living. “These factors continue to have an impact on the financial performance of companies,” Owen says. Some sectors that fared better than others during COVID are now suffering. “Construction risk in New Zealand continues to be at very high risk of insolvency, with companies continuing to fail with regularity.” Claims inflation due to higher legal costs and wages, as well as the threat of cyberattack are other factors on the radar for companies and risks that are industry agnostic.

The recent focus on data security is one key issue with a growing profile. The 2023 Thales Data Threat Report, for example, shows that three quarters of New Zealand organisations are worried about 5G network security threats. One interesting area is environmental, social and governance measures and the dangers for firms dealing with fast-moving issues like climate change and not having adequate procedures in place. “[This can] make placement of their insurance difficult as insurers move away from industries that are regarded as having negative environmental impacts,” Owen says. Climate change is a hot button issue for boards, regulators and customers alike, and problem practices such as ‘greenwashing’ have ample potential for more robust regulation as well as class actions.

Cyber threat front of mind for many New Zealand firms

of NZ organisations have reported an increase in ransomware attacks in the last 12 months

of IT professionals in NZ believe security threats are increasing in volume or severity

42%

of IT professionals in NZ are worried about 5G network security threats

74%

Source: 2023 Thales Data Threat Report

The wide range of risks and the changing environment suggest that, looking ahead, D&O cover will only become more valuable for companies, something the increase in insurer competition from abroad underscores. But not all insurers are equal in this area, and companies may be concerned that some newer players are only in the game because of the recent rosier profitability outlook for the line. “At BHSI we are focused on our long-term relationships with our customers, and look to form a long-term working association with them,” Owen says. BHSI engages in continuous dialogue with its customers and tries to hold face-to-face renewal meetings wherever it can despite the pandemic revolution in work protocols. “Because of these established relationships we are able to have open conversations with our customers and their brokers about necessary price increases, or indeed changes to the policy terms, at the earliest possible stage in the renewal process.”

Keeping it customer focused

Importantly, BHSI is not beholden to the reinsurance market when it sets its rates. In a hardening market, insurers that use reinsurance can face a combination of rate increases and reduced availability of prepaid reinstatements. “As we don’t rely on reinsurance for our capacity, we are not forced to change premiums or terms based on the reinsurance requirements, so we are able to work with our customers to achieve desirable outcomes for their D&O programs for both parties and make decisions in a timely manner,” Owen says. While there are economic factors that may threaten the market recovery, on balance it seems D&O could be out of its testing period and possibly hewing to a more even keel. Either way, expertise and experience on the ground is essential.

*BFSL 2007 Limited [2012] NZCA 604

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