David Lewin, Managing Director
Implications of the Financial Crisis for D&O Insurance
The premiums of Directors and Officers (D&O) insurance policies in Germany have nearly doubled in recent months because of fallout from the global financial crisis — after several years of declines. The market has tightened especially for financial institutions risks on account of the steadily rising number of financial services industry D&O claims.
Claims for damages are stipulated by disgruntled clients of the banking industry — as well as by shareholders complaining of management and supervisory board decisions that led to substantial losses. A central allegation is the false valuation of real property, with declining property prices increasing the financial risks associated with mortgages and mortgage-backed securities (MBS). Consequently, some D&O insurers are considering excluding subprime risks during the next D&O insurance renewal.
At present, D&O claims related to the financial crisis are estimated to reach approximately USD6 billion.
Environmental Damage Insurance Coverage Approach
The German Environmental Damage Act (Umweltschadengesetz – USchadG) came into force on November 14, 2007, based on Directive 2004/35/CE (dated April 21, 2004) on environmental liability with regard to the prevention and remedying of environmental damage. Its purpose was to establish a legal framework for environmental liability — based on the “polluter-pays” principle – to prevent environmental damage and make any necessary repairs.
The Act establishes liability for natural habitat and protected species damage, subject to public law. According to Sec. 2 USchadG, biodiversity, water (including groundwater), and soil (i.e. nature in general) are protected. Therefore, legal positions subject to private law and damages to individual goods are not affected by USchadG. Sec. 3 para. 1 USchadG stipulates that the liability of the polluter involves not only culpable breaches of duty but also strict liability in tort, provided certain requirements are met.
Once ecologic damage has occurred, the party responsible is obligated to remedy it and will be held liable. Correcting environmental damage, according to Annex II of the basic Directive, is achieved through the restoration of the environment to its baseline condition by way of primary, complementary, and compensatory remediation. To this end, the new Act stipulated a new kind of liability for which no insurance protection was available previously. Liability insurers regularly granted coverage for claims for damages subject to private law, but the general liability conceptions of the insurers did not comprise any liability subject to public law.
It was a challenge for the German insurance industry to react rapidly and deal with these new types of damages — not to mention to address how a damaged environment could be restored. The required coverage had to comprise, inter alia, emerging biodiversity damage, consisting of protected animal and plant species and protected natural habitats. Insurers’ risk assessments had to include a new point of view, especially operational risk and location risk to calculate appropriate premiums for coverage.
Once the new Act came into force (with retroactive reach) on April 30, 2007, the insurance industry worked with provisional cover concepts to accommodate the demand for protection. Subsequently, the German Insurance Association (GDV) developed non-binding model conditions on the basis of the earlier implemented Environmental Liability Act (Umwelthaftungsgesetz) to provide a compliant insurance solution. The basic cover grants insurance protection for environmental damage on foreign property and may be extended by various additional modules, such as coverage for unlawful activities by unknown third parties who fly-tip (i.e., litter) on the premises of the insured whereby a land contamination may be caused.
In the meantime GDV — in cooperation with various member companies – has developed a special software solution which helps carriers classify and evaluate location risks.
The first insurers have entered the market with individual cover based on the non-binding model conditions of GDV with variations because there is little uniformity among products, coverage extent, and liability insurance conditions.
The German insurance industry is now looking back on 18 months of experience in the environmental damage coverage market. Already, this form of coverage has become a matter of course for the responsible business and will join the ranks of commercial third party liability insurance and the environmental pollution policy as a reasonably complete solution.
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David Lewin, Managing Director