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What’s Behind the Rise in Executive Liability Insurance Prices?

January 8, 2013
What do gas, milk, bacon, electricity and now your Directors and Officers Liability Insurance coverage have in common? It may sound like the start of a bad joke but, in fact, they’re all goods or services that cost more than they used to.

Some of you may have noticed that the price of Directors and Officers Liability, or D&O Insurance, is going up. Companies and organizations across the biotechnology sector are seeing price increases, with publicly traded companies especially affected. All in all, rates have increased between 10 and 30 percent.

The biotechnology sector is not alone in this. Insurance companies are looking at all industries and reevaluating the risks involved. Providers are tightening their underwriting standards, bringing them in line with the level of risk associated with each business sector.

So what exactly is behind the increase in D&O Insurance rates for the biotechnology sector?The answer isn’t so cut-and-dry. In fact, there are several driving factors.

First and foremost, D&O rates were not adequately priced for several years. The premiums insurance providers charged were not enough to offset the money that was being paid out for claims.

Increased litigation is a major factor. Whether filed by shareholders, employees, competitors or government agencies, the number of lawsuits is up across the board. In 2011, 17 different life sciences companies, their directors, officers, and key employees were sued for alleged securities fraud. Those suits involved either financial misrepresentation or misrepresentations about product safety.

There has also been a big uptick in the number of merger and acquisition lawsuits. In the last 12 months there were more than 2,000 M&A transactions announced for health-care products, services and pharmaceutical companies, with the main targets being biotechnology and genetic companies. Nearly all M&A transactions involving publicly traded companies resulted in at least one lawsuit. Those lawsuits also resulted in higher losses. The average plaintiff award for these types of cases has risen from the low six-digit range to around $1.4 million.

Even if your company isn’t publicly traded, there is still a tremendous risk of a lawsuit. Product-related lawsuits are also on the rise. Phase II and Phase III lawsuits and litigation involving “Off Label Use” of approved products are becoming much more common, resulting in more expensive lawsuits.

Employment-related lawsuits continue to be a large source of loss for all types of biotechnology companies and organizations. Whether they are sued for discrimination, harassment, retaliation, or other reasons, the number of these types of cases is growing and the cost of defending these types of lawsuits is also getting increasingly expensive.

Other driving forces behind the rate increases involve changes within the insurance industry itself. The current economy is impacting insurers’ investment income. This income would usually help to offset the losses caused by increased litigation.

Something key to look at in all of this is that there are currently less than 20 insurance companies offering D&O coverage for the biotechnology industry in the U.S. That’s because many insurers have simply stopped providing coverage because they feel the industry is just too risky. One company that doesn’t share that opinion is Monitor Liability Managers, LLC.

Monitor understands the biotechnology industry better than its competitors.  We have served as the preferred provider of executive liability insurance for the Biotechnology Industry Organization (BIO) for more than 15 years and look forward to continuing that strong relationship. We have significant experience underwriting both public and private biotech companies and nonprofit organizations. Our D&O program is developed with BIO members’ needs in mind, with coverage that addresses their unique risks.

Joe Haltman is the senior vice president of underwriting, directors and officers liability for Monitor Liability Managers, LLC.