Sharply rising defense costs are a notable trend in Management Liability claims. Particularly in Private D&O cases, defense costs are the largest portion of losses incurred by insurers. Defense costs have been growing measurably over the past three years, and the pressure of wage inflation on legal salaries is expected to continue the trend.
In fact, partner’s hourly D&O rates could be around $1,800 per hour compared to roughly $1,000 just five years ago. Unsurprisingly, insurers’ defense costs increased 39% in 2019, 14% in 2020, and another 4% in 2021 (some contend this single-digit increase to the slowdown in the courts from Covid).
Aside from rate increases, there is another driver for increasing defense costs, and that is the Plaintiff’s Counsel’s increased inclination to personally name individual D&Os as defendants in lawsuits. According to well-known D&O coverage firm Bailey Cavalieri, “It is the rare case that only one insured is named as a defendant. Rather, plaintiffs routinely name as defendants virtually every officer or director marginally related to the wrongdoing alleged in the lawsuit.”
This is important for Insurance buyers to understand because the increase in defense costs pushes Insurers to work hard to manage retentions. So, while rates have been declining in 2022 and the first part of 2023, insurers will work to maintain retentions of five to six figures. This is because even a very defensible matter could cost between $150,000 – $300,000 to defend to a Motion to Dismiss.
Insureds can help manage these costs and benefit by maintaining their limits of Insurance and a better long-term relationship with their Insurer. Building a close and cooperative relationship allows the insureds to benefit from the Insurer’s considerable experience in this type of litigation and minimizes the risk that the Insurer will be surprised when the insureds seeks large payments from the insurer to settle the litigation.
Insured Should Consider:
- Making careful decisions concerning the number of firms retained where there are mutable Defendants.
- Negotiate Rates early on – they are not set in stone, and many firms will negotiate.
- Require defense firms to supply a budget and assess possible “offramps”/ exit strategies.
- Allow the Insurer to regularly review the law firm invoices for overcharges.
Be open to listening to recommendations from your D&O Insurer. They handle hundreds of cases a year and can provide strong insight into the management of complex litigation.