Why D&O Markets Could Cost You More: 4 Hidden Risks You Can't Ignore with Sridhar Manyem

In a recent episode of Risk Management: Brick by Brick, host Jason Reichl sits down with Sridhar Manyem, Senior Director and Head of Industry Research at AM Best, for a crucial conversation about the Directors & Officers insurance market that every board member and executive needs to understand. From concerning market complacency trends to emerging litigation threats, Sridhar reveals why the current D&O landscape might be setting organizations up for costly surprises.

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The Complacency Crisis Hidden in Plain Sight

Sridhar opens with a warning that should make every risk manager pause: "There's a lot of complacency coming out of COVID still lingering because the courts were closed." While D&O premiums have dropped steadily over twelve consecutive quarters, this pricing trend might not reflect the true risk environment.

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The market experienced significant upheaval in 2020-2021, driven by #MeToo movement claims and an influx of securities class-action lawsuits. Companies became risk-averse, and prices soared accordingly. But the current steep price declines raise a critical question: are we seeing genuine risk reduction or dangerous market complacency?

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The answer lies in understanding what COVID really did to the legal system. Court closures created massive backlogs that are just now moving through the system. Courts are finally hearing cases that should have been resolved years ago, leading to latent risks that could potentially surprise both insurers and policyholders.

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The Money Looking for Lawsuits Problem

Perhaps the most concerning trend Sridhar identifies is the rise of litigation funding. "These are firms that actually take money from investors," he explains, "and they use this money to really go after firms." This represents a fundamental shift in the litigation landscape—money actively seeking suits to file rather than injured parties seeking justice.

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This isn't just about more lawsuits; it's about the systematic pursuit of high-value settlements. Litigation funding firms raise capital from public and private investors specifically to pursue corporate litigation, creating a business model built around maximizing settlement values. For D&O insurers and corporate boards, this means facing opponents with deep pockets and sophisticated strategies focused purely on financial returns.

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The combination of litigation funding with what Sridhar calls "social inflation"—increasing skepticism toward corporations among jurors—creates a perfect storm for punitive damages that go far beyond basic indemnification.

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Why One Size Doesn't Fit All in D&O Coverage

"It's not a 'one size fits all' kind of an approach," Sridhar emphasizes when discussing D&O coverage decisions. Yet many organizations treat it exactly that way, relying on industry standards or previous year's limits without considering their unique risk profile.

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The factors that should drive D&O coverage decisions include risk appetite, company type and industry exposure, public versus private status, existing controls and disclosure practices, and jurisdictional requirements. A technology company faces fundamentally different risks than a healthcare firm or nonprofit organization.

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For companies operating across multiple jurisdictions, the complexity multiplies. Navigating different DEI and ESG policies between the US, EU, and other markets while maintaining consistent governance creates compliance challenges that directly impact D&O risk exposure.

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The Extended Risk Timeline Most Organizations Miss

One of the most misunderstood aspects of D&O coverage is its extended risk timeline. Unlike traditional property insurance, D&O policies operate on a claims-made basis with retroactive dates and extended reporting periods. "Just because the year is done, you cannot really close your books and say, 'We're done with this policy,'" Sridhar explains.

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This means organizations can face claims for incidents that occurred years before the current policy period, and potential claimants can file suits years after an incident occurs. The legal system's own timeframe for case resolution adds another layer of uncertainty. In some cases, organizations might face liability seven or more years after an incident, long after the original insurance policy has expired.

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This extended timeline is why market complacency is particularly dangerous. Soft market conditions today don't insulate organizations from claims arising from actions taken years ago under different market conditions.

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The Strategic Partnership Imperative

Throughout the conversation, Sridhar emphasizes the importance of working with knowledgeable advisors who understand the complexities of D&O coverage. The current soft market creates opportunities to adjust deductibles and retentions, but the coverage structure requires careful customization based on specific risk profiles.

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Organizations should balance internal counsel expertise with external perspectives, particularly for security litigation risk assessment. While internal counsel knows the company and its potential exposure points, external counsel brings broader industry perspective and specialized expertise in evolving legal trends.

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The key is asking the right questions: What's our actual risk appetite? How much can we afford to pay for our own claims? What controls do we have in place? What jurisdictions are we operating in? How have our disclosure practices evolved?

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Final Thoughts

As Sridhar puts it, "We're all in the business of helping the world, the economy to be more resilient." But resilience requires honest assessment of emerging risks, not wishful thinking based on favorable market conditions.

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The current D&O market presents both opportunities and hidden dangers. Organizations that take advantage of soft market conditions to reassess and right-size their coverage while addressing emerging risks like litigation funding and social inflation will be better positioned for whatever comes next.

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Those that simply renew existing coverage without strategic consideration may find themselves unprepared for a legal landscape that has fundamentally changed since their policies were originally structured.

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To hear more strategic insights from someone who's spent decades helping companies rethink their approach to risk financing, tune in to this episode of Risk Management: Brick by Brick.

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👉 Spotify: https://bit.ly/4oInQzJ 

👉 Apple Podcasts: https://apple.co/45tvAON 

👉 YouTube: https://youtu.be/wdvzMpjeAEY 

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Podcast Host: Jason Reichl

Executive Producer: Don Halliwell

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