May 5, 2024 • 38 mins
In this episode Michael Talmanson and Dereick Wood discuss the critical importance of D&O coverage for board members. They set the context with a backdrop of Newfront's recent capital infusion led by Goldman Sachs emphasizing the company's innovative approach to combining technology with insurance expertise.
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Big Ideas/Thoughts/Quotes
1. Background & industry evolution
· Michael shares his transition from legal practice to insurance, driven by a passion for technology and client service. He discusses how Newfront's technology platform and AI tools modernize the insurance experience, enhancing client's ability to manage and predict risks.
· Dereick discusses his extensive experience in handling complex D&O claims, underlining the evolution of claims and the increasing magnitude of derivative settlements.
“The differentiator is the information you can provide boards to make informed decisions about their actual losses.”
2. Newfront’s Innovation & Impact on the Insurance Market
· Newfront's strategy of blending high-tech solutions with traditional brokerage services to address the needs of a rapidly changing market. Michael highlights the critical role of experts like Dereick in navigating complex claims, underscoring the blend of technology and human expertise.
· Discussion on Newfront’s "breakthrough" technology which simplifies processes like contract reviews and risk assessments through AI, setting a new standard in the insurance industry.
“Since 2020, seven of the top ten largest derivative settlements have occurred, and the people on my team have been involved in all those settlements”
3. D&O Insights
· Comprehensive breakdown of D&O insurance coverage (Side A, B, and C) and its importance from a buyer's perspective. Michael and Dereick discuss practical scenarios and the vital protection D&O insurance provides to board members against potential liabilities and lawsuits
· Dereick provides insights into recent high-profile cases and settlements, demonstrating the critical nature of D&O coverage in protecting board members during legal challenges
· Strategic recommendations for board members to ensure adequate D&O coverage, emphasizing the importance of understanding policy details and the implications of board decisions on insurance claims
· Michael and Dereick providing practical advice to board members on avoiding litigation and ensuring robust D&O coverage. They stress the importance of diverse opinions and backgrounds on boards to enhance decision-making
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:05):
Hello, and welcome to On Boards, a deepdive at what drives business success.
I'm Joe Ayoub, and I'm herewith my co-host, Raza Shaikh.
Twice a month, On Boards is theplace to learn about one of the most
critically-important aspects of anycompany or organization; its board of
directors or advisors, with a focus on theimportant issues that are facing boards,
(00:28):
company leadership, and stakeholders.
Joe and I speak with a wide range ofguests and talk about what makes a board
successful or unsuccessful, what it meansto be an effective board member, and
how to make your board one of the mostvaluable assets of your organization.
Our guests today are Michael Talmansonand Dereick Wood, who are each vice
(00:50):
presidents at Newfront Insurance.
The topic of our podcast today isinsurance, Directors & Officers Insurance,
which is something vitally importantto everyone that serves on a board.
By way of background, before we introduceMichael and Dereick, I'm going to read
something from a Goldman Sachs memo thatI think will give you a good perspective
(01:14):
on why we thought discussing what Newfrontis doing is particularly interesting.
In April of 2022, the growth equitybusiness within Goldman Sachs asset
management led Newfront's recent capitalround, and here is part is what they
said as to why they decided to leadthat round, "Through our research, we've
(01:38):
developed an investment thesis aroundmodern full-stack disruptors and how
they are transforming large portionsof the financial services sector.
We invested in Newfront because oftheir unique marriage of technology and
insurance and benefits domain expertise.
(01:59):
We believe Newfront fits ourthesis perfectly and represents the
future of commercial insurance."
Michael is an executive vicepresident and founding partner
of the Boston office of Newfront.
Prior to that, he was a senior vicepresident in Arthur J Gallagher & Company,
and prior to that, he was a practicingattorney beginning his work in 1999
(02:22):
at Testa, Hurwitz in Boston, where hepracticed with a number of people I
know and still maintain friendships.
Dereick is the Senior VicePresident at Newfront.
He, before that, was the Vice Presidentat Berkshire Hathaway Specialty
Insurance and a Senior ComplexClaim Director at AIG prior to that.
(02:47):
He was a practicing lawyer beforemaking a career in the insurance world.
Welcome, Michael and Dereick,and thank you so much for
joining us today on On Boards.
Thanks for having us.
Thank you.
Michael, I'm going to start withyou for an overview of Newfront.
First, if you would start with basicbackground, then we'll just talk
(03:08):
about the breakthrough technology.
Sure, thanks.
Joe, as you mentioned, I began mycareer as a lawyer representing
technology and life science companies,really my passion and I continue to
work with companies in those spaces.
I became an insurance broker.
Like many people, I transitionedout of the practice of law into
something different and I'm surewe'll talk about this in our podcast.
(03:30):
One of my mentors at Tesla is a formerguest of yours, John Hession, who has now
joined us recently, and John in particularhad an entrepreneurial spirit that I
loved and I have really followed that inmy career to try to do entrepreneurial
things where I develop, maintain,and build upon client relationships.
(03:50):
Throughout my career, I transitioned froma lawyer to becoming an insurance broker.
First at the region's largestindependent broker where we focus on
technology and life science business.
We're acquired by a big global broker andI had a great, successful, happy career
and I thought I would stay there forever.
(04:10):
But you indicated some factors inthe Goldman thesis that we call
it that really drew my attention.
First, no matter what happens froma technology perspective, before
we focus on sort of the future ofinsurance, just a bit on the past,
insurance will always require expertsand they are the heart of what we do.
(04:32):
People like Dereick on the claim'sside, D&O experts, cyber experts, people
will never be replaced by technology.
But the industry is unbelievably, asI always say, sleepy, and I felt that
my clients deserve something far moresophisticated and future looking and
(04:53):
Newfront has created a technologyplatform, both a platform to help
clients manage risk and using AI toolsto help clients predict risk and have
much more informed, structured datathat I thought would modernize my
clients' experience and really providea unique solution, and so once Goldman
(05:15):
invested, I made the move with ninecolleagues to start the Boston office.
We're off to a great start.
So, talk a little aboutthe basics of Newfront.
Who you're able to provide D&O for?
Are there any limitations andwriting insurance for anyone?
And how big are you, et cetera,that kind of basic stuff so
(05:37):
people get a general picture.
Yes, let me just share very brieflyabout the history of Newfront.
We started as a firm, much like myoriginal firm that I mentioned, Arthur J.
Gallagher & Associates, it was afirm called ABD West Coast based, a
real tech and life science-focusedpowerhouse, privately-held broker.
(05:57):
Really, one of the leaders in thecountry for technology and life science
business, but they were based inCalifornia and that's where they operate.
They didn't have offices certainlyon this side of the country, and
they approached me many yearsago to start the Boston office.
Like I said, I was pretty happy withwhere I was, and then a company was
(06:18):
acquired by Newfront, so it's very,very interesting because Newfront was
a technology company, a venture-backedtechnology company that had a brokerage
business, but they were really focusingon creating technology solutions for
the use of their clients, but thebrokerage operation was very small.
(06:40):
Unlike most technology startup companies,they did something revolutionary.
They actually acquired an unbelievablyprofitable broker, an unbelievable
profitable business to help fuel both thegrowth of technology and the expansion
of the business across the country,and then Goldman led the round of
financing that you referenced in 2022.
(07:03):
Total game changer for me, and that'swhen we decided to make the move.
When we talked a few weeks ago,you said that Newfront is a modern
insurance broker with "breakthrough"technology that provides information
that others cannot provide.
What is the breakthrough technologyand what does it provide?
Breakthrough, I put in quotes becauseour industry is so sleepy, some of the
(07:27):
technology I would describe to you mightseem very basic, but we have a platform
that clients can use to manage risk.
They both manage their policies, theirday-to-day insurance needs, pay bills,
much like an online banking experiencethat we create for our clients that just
(07:48):
doesn't exist in the brokerage world.
You'd be surprised if a client needs acertificate of insurance or wants to pay
a bill or make changes to a policy, howoutdated that process is, so we have a
technological platform and then we alsouse AI to provide data for our clients on
(08:10):
contract review and what we're going totalk a lot about today, D&O loss model.
I think you said that thedifferentiator is the information you
can provide boards to make informeddecisions about their actual losses.
How does that work, big picture?
Sure.
So, we have a D&O loss modeling tool,and if you look at how predictive loss
(08:31):
was analyzed by boards traditionallyin our segment is, you would look
at class action settlement data forindustries based in certain market
cap bands, but it's all back looking.
It's all based on past trends.
Using AI machine learning and anincredibly large amount, both of data
(08:54):
inputs and a variety of factors, likea company's stock performance is one
example, the makeup of a company's board,performance, stock volatility, historical
trade volume, these are all factorsthat are not inputted in loss modeling.
Our machine learning tool is able to inputthat data and help provide an assessment
(09:21):
of volatility of loss and also thelikelihood of a claim in the first place.
So, if you look at how brokerstypically advise clients on risk,
it's all factored on whether aclaim is brought in the first place.
But before you can even determinewhat the value of a lawsuit be
in a claim, you want to know whatyour likelihood of getting sued is.
(09:43):
Our model allows thatinformation to be presented.
That's very helpful.
When we talked a few weeks ago, youmentioned that Newfront provides
a different level of service andexpertise and that there is no claim
you haven't seen in D&O, especiallywhen it comes to a board of directors.
(10:05):
Tell us a little bit why youcan make that claim and other
brokers are not able to make it.
I'll take this one.
Well, Joe, we've beendoing this for a long time.
As Raza mentioned earlier, based onmy experience both as an attorney and
working in-house for the AIGs and theBerkshires of the world, we've seen the
(10:25):
D&O product and also the claims thatarise that the policy responds to, we've
seen them evolve over the last few years.
That being said, since 2020, sevenof the top ten largest derivative
settlements have occurred, and thepeople on my team have been involved
in all those settlements, so eitheron the carrier side or as a broker.
(10:46):
So, while other brokers haveseen those claims as well,
we've been involved in them.
I was involved with settling some of theseclaims as well, so we have that anecdotal
perspective as well as the AI as Michaelwas talking about to kind of predict
what's going to happen in the future.
So, we're very well versed inwhat's happened in the D&O landscape
(11:07):
in terms of settlement trends,but also where things are going.
We definitely have our finger onthe pulse of what the claims we are
looking at in terms of when theybring claims derivatively against the
corporation and the board of directorsis held accountable, and we're also
looking at all different types oflitigation trends or even regulatory
trends that might affect directorsand officers, anyone on the board.
(11:29):
It's one of those things where our teamwith over 50 to 75 years of experience
come cumulatively in terms of Directors& Officers claims, and claims that affect
the board of directors, we're very wellversed, and we're definitely on the
pulse of what's going to happen nextin terms of what's happening right now.
Thank you.
Michael, if I start with you andDereick, please, add as well.
(11:52):
I just want to know what is D&Oinsurance from a buyer's perspective,
what are the common features,parameters or configurations the
board ought to be looking at, andwhat do we seek the D&O insurance for.
The policy provides protectionfor all past, present, and
(12:12):
future officers and directors.
So, if a new board member joinsduring a policy period, you don't
have to make any changes to thepolicy, they're automatically covered.
Same thing with an officer of the company.
A D&O policy has three sectionsto it, side A, side B, and side C.
So, side A covers the individualdirectors for non-indemnifiable
(12:33):
claims where the company cannotindemnify its officers and directors.
Side B reimburses the company when thecompany is able to indemnify its officers
and directors, and side C is coveragefor the entity if the entity is named in
a claim that's covered by a D&O policy.
For the bulk of your listeners, whatthey're going to care most about is
(12:55):
the side A coverage, because in theworst-case scenario, where the company
is unable to indemnify its officers anddirectors, either because it's prevented
by law from doing it, or it doesn'thave the financial resources to do so,
the insurer will step in, and Dereick,I think, can add a lot more color on
the importance of side A coverage.
(13:15):
Sure, no problem.
And Michael, you're 100% correct.
There are three different modules ofcoverage, the A, the B, and the C.
The side C coverage, as Michael said, isusually just for the entity in terms of a
securities claim, and they offer balancesheet protection for the corporation
should they be brought into a suit.
That side B, as also as Michaelelaborated on, that refunds the entity
(13:38):
for any amounts of loss that they paidto identify a director and officer,
but as Michael said, the most importantprime module is that side A module.
We call it side A, or maybe asleep covered and it's called sleep
insurance because it allows directorsand officers to sleep at night.
As Michael said, that'sfor non-indemnifiable loss.
So, in the case of insolvency, weusually see a lot of claims brought
(14:00):
after a bankruptcy and usually broughtagainst the board of directors,
therefore, that is where that side Acoverage comes in to kind of backstop
any kind of personal asset protectionand really stand in front of it.
Also, we see side A cover used a lot,and as I mentioned earlier, in this
onset of derivative complaints andderivative settlements because those
derivatives settlements are brought byshareholders on behalf of the corporation,
(14:24):
the corporation can't pay that loss.
It's not indemnifiable so that's whenthe directors and officers will look
at that side A insurance that they'vepurchased from a carrier to fill in and
pay that settlement so that doesn't comeout of their pockets and just given the
exposure and severity we've seen in thesesettlements, it's really one of the most
important products you can have rightnow, because as we all know, once we see
(14:47):
one settlement, there's always going tobe another one that's even higher because
that's just kind of how litigation worksand how the dynamics of settlements
have played out over the last few years.
So, two quick follow ups.
Michael, you mentionedpast, present and future.
Does that mean even if I'm no longera director on a board, that if a
(15:08):
future litigation happens, that I amstill covered and then how does this
whole thing work in terms of whenthe claims start happening, do I have
cash advances or do I get reimbursed?
I know these are super minor details,but curious how these two things work.
Raza, they're not minor details tothe board member that's being sued.
(15:29):
I mean, that is why we're slightlyinteresting to people is because these
D&O claims can be big, nasty and itis an interesting area of coverage.
A short answer to your first question,if you are a former director and you
get sued within the time period that aclaim is made policy, so the policy that
(15:51):
responds is a policy that's in placewhen a claim is brought, even if the
matter happened or the action givingrise to claim happened in the past.
So the short answer is yes,a prior director is covered.
Most of the policies are.
subject to a retention except if it's aSide A loss where it's unidentifiable.
(16:11):
At that point, yes, the policy, Raza,will step in and advance payments for
defense costs or any settlements witha zero dollar retention or deductible.
That's a great point.
One thing that we should emphasizeas to why you refer to side
A coverage as sleep coverage.
The directors don't have to come out ofpocket, so it's why it's vitally important
(16:32):
that a company have D&O in place beforean individual director chooses to take
a board seat because they want to makesure they're covered in the event of a
claim, but they also want to make surethey don't have to come out of pocket
for the retention or a deductible.
So, if I am being asked to join aboard, it's good for me to check
that their D&O insurance is not onlycurrent, has adequate coverage, and
(16:55):
somebody has been paying the premiums.
That's correct.
Correct.
So, let's talk about the coverage,and particularly some of the claims
that are made, which some of thelisteners will be familiar with.
The first one to talk about is breachof fiduciary duty, and I think when we
talked previously, we talked about theBoeing case, because I think that was one
(17:17):
of the claims that was made against boardmembers in that case, and the other one
are so called Caremark claims, which Ibelieve are breach of the duty of loyalty.
Could you talk about those twoclaims and what they mean day-to-day
when you're sitting on the board?
Michael, I'll take this one, butfeel free to add in if you want.
Listen, the Caremark claim where thebreach of a duty of loyalty and care to
(17:38):
the corporation is a breach fiduciarycase where they're saying that the
board members have failed their dutyof oversight like Boeing or Wells
Fargo to oversee the corporation andmake sure the corporation has internal
controls and that the corporation isin compliance with those controls.
This is very important becauseshareholders, when they file a claim
(17:59):
saying that the board has failed inits oversight, they're saying that
the corporation has been harmed, bothreputationally and by other damages,
such as in fines or penalties, andtherefore has suffered monetary
damages, and they're looking at theboard to either call back money from
the board or pay for those damages.
That's where that side A coverage comesin, and these settlements are large.
(18:22):
The Boeing settlement was 237.
5 million dollars.
That was a claim against the board forfailing to oversight for the 737 MAX.
Wells Fargo was 240 million.
That was failure to oversight withunauthorized account scandal and
we just saw the Tesla 735 million,and that was more concerning boards
breaching their fiduciary duty interms of compensation plans so what
(18:45):
we've seen over these past few yearsare tremendous amounts of settlements
aimed at the boards for failing intheir oversight capacity to kind of
be independent and oversee the board.
One of the things that my formerCEO, Warren Buffett's saying is,
what did you know, when did you knowit and what did you do about it?
And that is what boards are being heldaccountable for is, what did you know.
(19:08):
Just like in the Boeing case, when didyou find out that there were issues
with this plane, and then what did youdo about it in terms of controls or
compliance or checking any red flags tomake sure that it didn't happen again?
That's really well explained.
I think that's great.
What about private companies though?
The suits you talked about, the claimsyou talked about are public companies.
(19:29):
Private companies get sued, board membersget sued for breach of fiduciary duty and
breach of the duty of loyalty as well.
Talk about those claims.
Yeah, I'll jump in just againfrom a high-level perspective.
It's so interesting because even thoughthe coverage is generally the same for
a private and public company, althoughthe policy forms are different, the
(19:52):
exposure is wildly different andthe premiums are wildly, wildly,
wildly different from one another.
What I would generally say to my clientsis that if you're a well-financed private
company, the risk of a D&O claim is verylow, but for all the reasons we talked
about; outside investor, an investor oran independent director, they're not going
(20:15):
to serve on the board unless there's D&Ocoverage in place regardless of the risk,
so you need the D&O portion of the policy,but what would actually respond most for a
private company is an employment practiceliability policy that covers claims
relating to sexual harassment, wrongfultermination, discrimination, and then
(20:36):
going back to the D&O piece for companiesthat are not well financed or not
performing well, that's when the risk ofa claim is the highest and honestly where
you need a really sophisticated broker toget coverage in the first place because
insurers like to see that a companyhas a fairly lengthy runway of cash.
(21:02):
Let's say that a company has lots ofcash and then runs into trouble, the
coverage obviously stays with the company,even though it's run into trouble.
Correct?
Absolutely.
If it were used on an annual basis,so if a company is well financed and
not in trouble in year one and inyear two, there's something indicating
that the performance of the companyis going the other direction, that
(21:24):
should be reflected in the premiums,but coverage should be available.
Knock on wood, I have not seen acompany not be able to get D&O coverage.
I think what you said was if acompany's performance is not going
well, coverage "should be available".
What are the situations in which for aprivate company it becomes unavailable.
(21:48):
I have not seen coveragebecoming unavailable.
It's sometimes very difficultand that's why my hair discolors.
You have to argue and fight withcarriers to get coverage, but
sometimes they may extend the policyand I can explain why that can put
a company in a difficult position.
If a claim has already arisen duringa policy year, it can compromise the
(22:12):
limit, and if a carrier then wants towait to offer coverage to see if they're
going to get financed, let's say, andthey extend the policy, that limit that
was supposed to be available for 12months gets extended for whatever the
extension period is, and then there'sno guarantee that the company is going
to be offered coverage in the future.
(22:33):
But what we see all the time is companiestelling carriers because it's a truth
that they're in the middle of negotiatinga round of financing or they have a term
sheet, so a signed term sheet is betterthan negotiating a financing and having
a deal closed, waiting for the money tohit the bank is better than a signed term
(22:53):
sheet, but depending on where you are inthe financing cycle, if you're struggling,
it can be difficult to get coverage.
Not necessarily impossible.
Are there cases in which you havebeen involved where you denied
coverage to a company that wasrunning into trouble financially?
In my career, I have not had a clientwho's been unable to get insurance.
(23:15):
Dereick, I don't know if you have.
Yeah, I would agree with Michael withthat, and just to be clear, as the broker,
we're going out pursuing coverage forthe clients, but the insurance carriers
are the ones who are ultimately goingto bind the insurance or not, and like
Michael said, the underwriters for thecarriers are very in tuned with all the
companies and all the different businessareas, so they're going to be looking
(23:38):
under the hood for all these companies.
But I do agree with Michael, if thecompany is solvent and can put forward
a business plan and financials, it'svery extremely rare that they wouldn't
be offered some type of coverage.
So, that's our job to try to maximizethe coverage that they would be able
to get and to make sure that if theydo have an event where there's a claim
(24:00):
and they need to access the coverage,that everything works as it should be,
and that the coverage would kick in.
The carriers may step in in a reallybad situation and say we're going to
exclude certain claims or we want tohire retention, or we're going to jack up
your premiums significantly, not to turnthis into an advertisement for Newfront,
but you do need a broker who is wellversed in situations, both representing
(24:25):
unbelievably successful companies, butalso companies that are struggling.
You need to have really strongrelationships with the carriers to
make sure that the coverage has somany holes in it that in a troubled
situation, there wouldn't be any realcoverage, even if a policy exists.
So, one of the things we talked aboutis where the highest premiums are
(24:45):
sometimes found, and the two areasyou talked about were science and
technology and cyber risk insurance.
Can you tell us a little about that, andeither one of you can jump in for this.
Sure.
Yeah, it's one area we focus a loton and unbelievably complicated is
product liability claims for lifescience companies that are involved
(25:08):
in clinical trials, and this was oneof the compelling reasons that my team
and I joined Newfront is that we havea technology platform, the only one in
the industry that I'm aware of whereour clients can go and obtain clinical
trial coverage through our portal.
They can access the portal to lookat country requirements to see what's
(25:30):
required, upload informed consents andprotocols, and next thing you know, it
automatically spits out a bindable quote.
Even though it might be easy to getcoverage, the more involved the company
is in the clinic, the higher pricethe policy is and the more robust
your life science program needs to be.
Similarly, with cyber coverage, really hotbutton area in the world of insurance now.
(25:55):
It's amazing how disinterestedboards are in certain areas of
insurance and how interested theyare in D&O insurance and cyber.
The amount of questions we get on cyberover the last three, four, five years,
as you can imagine, has just exploded,and it's really important that you
(26:17):
have a broker who can respond to prettyinterested directors in this area.
Let me ask this question.
If there's a cyber breach and personalinformation is suddenly available to
the public, is that a cyber insurancecoverage or could it also be a D&O
(26:38):
coverage for the failure of the boardto properly monitor and oversee the
protections that their company areproviding for this important data?
So, for that question, theanswer is yes, it can be both.
So, a cyber policy providesfirst-party and third-party coverage.
So, if there's a dissemination ofpersonally identifiable information,
(27:01):
personal health information, confidentialinformation, there's coverage for
the company for costs and expenses itincurs to provide notice, to hire a
forensics firm, to hire a legal expert.
There's third-party coverage if they'resued relating to the data breach,
and as Dereick can talk about, aD&O policy may respond if there is a
(27:23):
securities claim alleging a drop instock price because of the cyber matter.
Yeah, 100% correct, Michael.
What we're seeing, Joe and Raza, iswe're seeing this play out in real life
all the time now where just we're seeinglarger breaches, we're seeing business
interruption, we're seeing privacyactions brought on top of that because
(27:45):
of the leak of personal information,and then what we're seeing is a D&O
claim coming out of that, whether youlook at Equifax, whether it's a stock
drop related to the breach, and thenyou bring a suit, or maybe something
that Michael alluded to earlier wherethere's a policy in place that wasn't
properly overseen and we should have beenaware that we had these issues with our
(28:05):
cyber and that's what led to this loss.
And we've also seen now where a lotof boards are required to have a
cyber expert or our CISO on theirboard, just for this very reason,
because we've seen cyber losses leakinto D&O extremely frequently lately.
Speaking of the risk profile of differentcompanies, I know public companies have
(28:26):
a very different risk profile for D&Oinsurance versus private companies.
Dereick, I wanted to ask you aboutthe specific situations where an
activist shareholder gets involvedand comes into the picture.
What does that do to the D&O insurance?
Well, the D&O insurance, anytimean activist shareholder starts
(28:46):
sending letters to the board or acompany, we automatically notice the
D&O carrier because automaticallythere is now a cloud of potential
litigation around the company.
So whether or not it's a claim underthe policy of that first letter or
something that could be a circumstancethat could lead to a claim.
It's something that we want ourcarriers to be informed of because
(29:09):
as we've mentioned earlier, theseare all potential losses that could
affect the board of directors.
Basically, the activist shareholderis saying that you, the board,
the CEO who run this company,you're doing something wrong, and
this is what you should be doing.
So, those are potential wrongfulacts that could trigger coverage
under a policy, depending on how theletters are stated, and usually it's
(29:30):
one letter, which leads to another.
Definitely, those are things that wedeal with every day and things that
we involve our carriers with becauseto the extent that that demand now
becomes an actual claim and somethingwhere the company feels they have to
retain defense counsel to respond tosome of these activist letters, that's
something that typically is coveredonce the insurance brief is triggered.
(29:52):
Yeah.
Sounds like a great ideato have that coverage.
Michael, maybe switch to the costand premiums for this insurance.
I'm sure there's a range.
I'm sure it varies.
Give us just the kind of like just aballpark or let's say US-based insurance.
So, a couple of data points for a privatecompany for an early stage investor-backed
(30:16):
company tends to be when they would buyinsurance for the first time, they might
purchase a million dollars of coveragethat could be $3,000 out of the gate.
If they wanted more limit,it could be $15,000.
So, you're looking at a fairly tightrange for an early stage company.
As a company gets closer to an IPOor an exit we recommend that they
(30:37):
would have a minimum of $5 millionof coverage and the premium might
jump up to 50-ish thousand dollars.
If you're a unicorn with eyes to gopublic and big revenue, it could be
a couple hundred thousand dollars for5 to 20 million dollars of coverage.
Twenty million I think would behigh for any private company.
(31:00):
Conversely, when a company goes public,I always say the day before an IPO,
you might spend $40,000 of insuranceand then you start trading and your
insurance jumps up in the millions.
I mean, it's really a significant itemthat as a company is preparing for an IPO
at least 12 months in advance, they needto start thinking about budgeting for
(31:22):
an IPO, the process to get D&O coverage.
You have an underwriter meetingwhen you file a confidential s1.
You want to have nondisclosureagreements in place with the carriers
because there are no applicationswhen a company goes public.
There's a story that's told inan underwriter meeting and all
(31:42):
underwriting is based off of the S1and publicly available information.
So, it's a real game changer from acoverage standpoint and the premiums
might start around a million dollars withretentions or deductibles in the millions.
We would see a retention of twoand a half million dollars for
(32:03):
a company that's going public.
Well, one thing that's also veryinteresting when you look at where
claims are brought against publiccompanies, the risk of a D&O claim is
actually higher within the first threeyears of an IPO, so the cost of your
D&O insurance in any market, right nowwe're in a soft D&O market, so premium
(32:25):
should be dropping in some cases, very,very significantly, although there
are signs that the market is turning.
But if you're three years or moreaway from an IPO, your premiums
actually might be lower than they werewithin that window closer to an IPO.
And this underwriter meeting youmentioned, sounds like this is where
(32:45):
a broker like Newfront can reallymake the difference and prepare
the client with the proper contextto have an effective meeting.
Absolutely, and one of the things that Ilike to say is when a company is getting
ready to go public or negotiating apublic policy, they've been public for
(33:05):
a long time, the person negotiatingcoverage on their behalf is not me.
I manage the relationship withclients, but we have experts
with deep, deep experience.
The person who my colleague, JamesCiarleglio, who runs our Northeast
D&O practice ran AIG's D&O practice,so he has years and years under his
(33:27):
belt as an underwriter so he cansit with management teams as they
prepare for this underwriter meeting.
to alert them to what the carrierswill be most interested in an
underwriting meeting, give guidance onhow to present financial information.
If a company is involved in clinicaltrials, this is one thing we do all the
(33:48):
time to share a story about the drug andwhere they are in the clinic and results.
So, telling the company story Is sovitally important and having some
who sat on the other side of thetable from that perspective is really
hugely valuable when you're preparingfor that very important meeting.
(34:09):
When you're spending millions, we alwayssay to our clients do not underestimate
the importance of that meeting.
Michael and Dereick, the final questionI wanted to ask you was your top one or
two tips to boards for practices thatlead them to avoid trouble with D&O.
(34:29):
My advice would be to listen to yourlawyers and when there are questions
about what to disclose or not todisclose, it's really important
to listen to your legal team.
One of the things that has made me Ithink successful in this career is how
much I respect companies' legal teams,and they're just absolutely invaluable.
(34:53):
And Dereick?
Yeah, I think that's a great point.
And along those lines, obviously,number one, know your insurance and
your broker, and ask them any questions.
But along the lines of what Michaelsaid, especially when you're dealing
with a board dealing with transactions,anything like that, make sure that
you're getting fair opinions and thatyou are doing everything by the book.
(35:15):
I mean, take your time.
One of the most frequent things wesee is that there was a rush to get
something done and we skipped oversteps two, three and four, just to
close the deal or to make it happen andthen we see the litigation come shortly
thereafter, so that would be my tips.
But I think they all fall in line withjust trust your lawyers and make sure
(35:36):
that you're doing everything by the book.
How about doing your job?
So, putting the lawyers aside, if youlooked at something like the Boeing
case, Silicon Valley Bank, the questionreally became is where was the board?
That's not a lawyer issue.
That's a board issue.
The board may not have, and I don'tknow the details, but the allegations
(36:00):
have been in these cases, that the boardreally did not act when it needed to.
So back to the question, what shouldboards do or what can they do before
the lawyers are involved to dotheir job in a way that might help
them avoid the kind of D&O coverageclaims that we've been talking about.
(36:25):
I think it is what Bill Belichick said.
Do your job.
One thing that I would recommendand we've talked with you guys about
this is as we're leading up to this,I think diversity of opinion and
backgrounds on boards is critical.
A well composed board goes along way in decision making
and helping you do your job.
(36:46):
Absolutely.
Dereick, you agree with that?
I agree with it a 100%, and that'ssomething that we've seen obviously a
big top of an issue lately, but In termsof practice now plays out, I think the
diversity of thought is something that awell constructed board is usually one that
has a lot of different diversity in termsof thoughts and the members on that board.
(37:08):
Michael and Dereick, it's beengreat speaking with you today.
Thanks so much for joining us.
was a lot of fun guys.
Thank you very much.
Joe.
Thanks.
And thank you all for listeningto On Boards with our guests,
Michael Talmanson and Dereick Wood.
Please visit our websiteat OnBoardsPodcast.com.
That's OnBoardsPodcast.com.
(37:31):
We'd love to hear your comments,suggestions, and feedback.
And if you're not already a subscriber,please be sure to subscribe at
Apple Podcasts, Spotify, or whereveryou get your podcasts and remember
to leave us a five-star review.
Please stay safe and take careof yourselves, your families, and
your communities as best you can.
(37:52):
We hope you'll tune in forthe next episode of On Boards.
Thanks.
Hello, and welcome to On Boards, a deepdive at what drives business success.
I'm Joe Ayoub, and I'm herewith my co-host, Raza Shaikh.
Twice a month, On Boards is theplace to learn about one of the most
critically-important aspects of anycompany or organization; its board of
directors or advisors, with a focus on theimportant issues that are facing boards,
(00:28):
company leadership, and stakeholders.
Joe and I speak with a wide range ofguests and talk about what makes a board
successful or unsuccessful, what it meansto be an effective board member, and
how to make your board one of the mostvaluable assets of your organization.
Our guests today are Michael Talmansonand Dereick Wood, who are each vice
(00:50):
presidents at Newfront Insurance.
The topic of our podcast today isinsurance, Directors & Officers Insurance,
which is something vitally importantto everyone that serves on a board.
By way of background, before we introduceMichael and Dereick, I'm going to read
something from a Goldman Sachs memo thatI think will give you a good perspective
(01:14):
on why we thought discussing what Newfrontis doing is particularly interesting.
In April of 2022, the growth equitybusiness within Goldman Sachs asset
management led Newfront's recent capitalround, and here is part is what they
said as to why they decided to leadthat round, "Through our research, we've
(01:38):
developed an investment thesis aroundmodern full-stack disruptors and how
they are transforming large portionsof the financial services sector.
We invested in Newfront because oftheir unique marriage of technology and
insurance and benefits domain expertise.
(01:59):
We believe Newfront fits ourthesis perfectly and represents the
future of commercial insurance."
Michael is an executive vicepresident and founding partner
of the Boston office of Newfront.
Prior to that, he was a senior vicepresident in Arthur J Gallagher & Company,
and prior to that, he was a practicingattorney beginning his work in 1999
(02:22):
at Testa, Hurwitz in Boston, where hepracticed with a number of people I
know and still maintain friendships.
Dereick is the Senior VicePresident at Newfront.
He, before that, was the Vice Presidentat Berkshire Hathaway Specialty
Insurance and a Senior ComplexClaim Director at AIG prior to that.
(02:47):
He was a practicing lawyer beforemaking a career in the insurance world.
Welcome, Michael and Dereick,and thank you so much for
joining us today on On Boards.
Thanks for having us.
Thank you.
Michael, I'm going to start withyou for an overview of Newfront.
First, if you would start with basicbackground, then we'll just talk
(03:08):
about the breakthrough technology.
Sure, thanks.
Joe, as you mentioned, I began mycareer as a lawyer representing
technology and life science companies,really my passion and I continue to
work with companies in those spaces.
I became an insurance broker.
Like many people, I transitionedout of the practice of law into
something different and I'm surewe'll talk about this in our podcast.
(03:30):
One of my mentors at Tesla is a formerguest of yours, John Hession, who has now
joined us recently, and John in particularhad an entrepreneurial spirit that I
loved and I have really followed that inmy career to try to do entrepreneurial
things where I develop, maintain,and build upon client relationships.
(03:50):
Throughout my career, I transitioned froma lawyer to becoming an insurance broker.
First at the region's largestindependent broker where we focus on
technology and life science business.
We're acquired by a big global broker andI had a great, successful, happy career
and I thought I would stay there forever.
(04:10):
But you indicated some factors inthe Goldman thesis that we call
it that really drew my attention.
First, no matter what happens froma technology perspective, before
we focus on sort of the future ofinsurance, just a bit on the past,
insurance will always require expertsand they are the heart of what we do.
(04:32):
People like Dereick on the claim'sside, D&O experts, cyber experts, people
will never be replaced by technology.
But the industry is unbelievably, asI always say, sleepy, and I felt that
my clients deserve something far moresophisticated and future looking and
(04:53):
Newfront has created a technologyplatform, both a platform to help
clients manage risk and using AI toolsto help clients predict risk and have
much more informed, structured datathat I thought would modernize my
clients' experience and really providea unique solution, and so once Goldman
(05:15):
invested, I made the move with ninecolleagues to start the Boston office.
We're off to a great start.
So, talk a little aboutthe basics of Newfront.
Who you're able to provide D&O for?
Are there any limitations andwriting insurance for anyone?
And how big are you, et cetera,that kind of basic stuff so
(05:37):
people get a general picture.
Yes, let me just share very brieflyabout the history of Newfront.
We started as a firm, much like myoriginal firm that I mentioned, Arthur J.
Gallagher & Associates, it was afirm called ABD West Coast based, a
real tech and life science-focusedpowerhouse, privately-held broker.
(05:57):
Really, one of the leaders in thecountry for technology and life science
business, but they were based inCalifornia and that's where they operate.
They didn't have offices certainlyon this side of the country, and
they approached me many yearsago to start the Boston office.
Like I said, I was pretty happy withwhere I was, and then a company was
(06:18):
acquired by Newfront, so it's very,very interesting because Newfront was
a technology company, a venture-backedtechnology company that had a brokerage
business, but they were really focusingon creating technology solutions for
the use of their clients, but thebrokerage operation was very small.
(06:40):
Unlike most technology startup companies,they did something revolutionary.
They actually acquired an unbelievablyprofitable broker, an unbelievable
profitable business to help fuel both thegrowth of technology and the expansion
of the business across the country,and then Goldman led the round of
financing that you referenced in 2022.
(07:03):
Total game changer for me, and that'swhen we decided to make the move.
When we talked a few weeks ago,you said that Newfront is a modern
insurance broker with "breakthrough"technology that provides information
that others cannot provide.
What is the breakthrough technologyand what does it provide?
Breakthrough, I put in quotes becauseour industry is so sleepy, some of the
(07:27):
technology I would describe to you mightseem very basic, but we have a platform
that clients can use to manage risk.
They both manage their policies, theirday-to-day insurance needs, pay bills,
much like an online banking experiencethat we create for our clients that just
(07:48):
doesn't exist in the brokerage world.
You'd be surprised if a client needs acertificate of insurance or wants to pay
a bill or make changes to a policy, howoutdated that process is, so we have a
technological platform and then we alsouse AI to provide data for our clients on
(08:10):
contract review and what we're going totalk a lot about today, D&O loss model.
I think you said that thedifferentiator is the information you
can provide boards to make informeddecisions about their actual losses.
How does that work, big picture?
Sure.
So, we have a D&O loss modeling tool,and if you look at how predictive loss
(08:31):
was analyzed by boards traditionallyin our segment is, you would look
at class action settlement data forindustries based in certain market
cap bands, but it's all back looking.
It's all based on past trends.
Using AI machine learning and anincredibly large amount, both of data
(08:54):
inputs and a variety of factors, likea company's stock performance is one
example, the makeup of a company's board,performance, stock volatility, historical
trade volume, these are all factorsthat are not inputted in loss modeling.
Our machine learning tool is able to inputthat data and help provide an assessment
(09:21):
of volatility of loss and also thelikelihood of a claim in the first place.
So, if you look at how brokerstypically advise clients on risk,
it's all factored on whether aclaim is brought in the first place.
But before you can even determinewhat the value of a lawsuit be
in a claim, you want to know whatyour likelihood of getting sued is.
(09:43):
Our model allows thatinformation to be presented.
That's very helpful.
When we talked a few weeks ago, youmentioned that Newfront provides
a different level of service andexpertise and that there is no claim
you haven't seen in D&O, especiallywhen it comes to a board of directors.
(10:05):
Tell us a little bit why youcan make that claim and other
brokers are not able to make it.
I'll take this one.
Well, Joe, we've beendoing this for a long time.
As Raza mentioned earlier, based onmy experience both as an attorney and
working in-house for the AIGs and theBerkshires of the world, we've seen the
(10:25):
D&O product and also the claims thatarise that the policy responds to, we've
seen them evolve over the last few years.
That being said, since 2020, sevenof the top ten largest derivative
settlements have occurred, and thepeople on my team have been involved
in all those settlements, so eitheron the carrier side or as a broker.
(10:46):
So, while other brokers haveseen those claims as well,
we've been involved in them.
I was involved with settling some of theseclaims as well, so we have that anecdotal
perspective as well as the AI as Michaelwas talking about to kind of predict
what's going to happen in the future.
So, we're very well versed inwhat's happened in the D&O landscape
(11:07):
in terms of settlement trends,but also where things are going.
We definitely have our finger onthe pulse of what the claims we are
looking at in terms of when theybring claims derivatively against the
corporation and the board of directorsis held accountable, and we're also
looking at all different types oflitigation trends or even regulatory
trends that might affect directorsand officers, anyone on the board.
(11:29):
It's one of those things where our teamwith over 50 to 75 years of experience
come cumulatively in terms of Directors& Officers claims, and claims that affect
the board of directors, we're very wellversed, and we're definitely on the
pulse of what's going to happen nextin terms of what's happening right now.
Thank you.
Michael, if I start with you andDereick, please, add as well.
(11:52):
I just want to know what is D&Oinsurance from a buyer's perspective,
what are the common features,parameters or configurations the
board ought to be looking at, andwhat do we seek the D&O insurance for.
The policy provides protectionfor all past, present, and
(12:12):
future officers and directors.
So, if a new board member joinsduring a policy period, you don't
have to make any changes to thepolicy, they're automatically covered.
Same thing with an officer of the company.
A D&O policy has three sectionsto it, side A, side B, and side C.
So, side A covers the individualdirectors for non-indemnifiable
(12:33):
claims where the company cannotindemnify its officers and directors.
Side B reimburses the company when thecompany is able to indemnify its officers
and directors, and side C is coveragefor the entity if the entity is named in
a claim that's covered by a D&O policy.
For the bulk of your listeners, whatthey're going to care most about is
(12:55):
the side A coverage, because in theworst-case scenario, where the company
is unable to indemnify its officers anddirectors, either because it's prevented
by law from doing it, or it doesn'thave the financial resources to do so,
the insurer will step in, and Dereick,I think, can add a lot more color on
the importance of side A coverage.
(13:15):
Sure, no problem.
And Michael, you're 100% correct.
There are three different modules ofcoverage, the A, the B, and the C.
The side C coverage, as Michael said, isusually just for the entity in terms of a
securities claim, and they offer balancesheet protection for the corporation
should they be brought into a suit.
That side B, as also as Michaelelaborated on, that refunds the entity
(13:38):
for any amounts of loss that they paidto identify a director and officer,
but as Michael said, the most importantprime module is that side A module.
We call it side A, or maybe asleep covered and it's called sleep
insurance because it allows directorsand officers to sleep at night.
As Michael said, that'sfor non-indemnifiable loss.
So, in the case of insolvency, weusually see a lot of claims brought
(14:00):
after a bankruptcy and usually broughtagainst the board of directors,
therefore, that is where that side Acoverage comes in to kind of backstop
any kind of personal asset protectionand really stand in front of it.
Also, we see side A cover used a lot,and as I mentioned earlier, in this
onset of derivative complaints andderivative settlements because those
derivatives settlements are brought byshareholders on behalf of the corporation,
(14:24):
the corporation can't pay that loss.
It's not indemnifiable so that's whenthe directors and officers will look
at that side A insurance that they'vepurchased from a carrier to fill in and
pay that settlement so that doesn't comeout of their pockets and just given the
exposure and severity we've seen in thesesettlements, it's really one of the most
important products you can have rightnow, because as we all know, once we see
(14:47):
one settlement, there's always going tobe another one that's even higher because
that's just kind of how litigation worksand how the dynamics of settlements
have played out over the last few years.
So, two quick follow ups.
Michael, you mentionedpast, present and future.
Does that mean even if I'm no longera director on a board, that if a
(15:08):
future litigation happens, that I amstill covered and then how does this
whole thing work in terms of whenthe claims start happening, do I have
cash advances or do I get reimbursed?
I know these are super minor details,but curious how these two things work.
Raza, they're not minor details tothe board member that's being sued.
(15:29):
I mean, that is why we're slightlyinteresting to people is because these
D&O claims can be big, nasty and itis an interesting area of coverage.
A short answer to your first question,if you are a former director and you
get sued within the time period that aclaim is made policy, so the policy that
(15:51):
responds is a policy that's in placewhen a claim is brought, even if the
matter happened or the action givingrise to claim happened in the past.
So the short answer is yes,a prior director is covered.
Most of the policies are.
subject to a retention except if it's aSide A loss where it's unidentifiable.
(16:11):
At that point, yes, the policy, Raza,will step in and advance payments for
defense costs or any settlements witha zero dollar retention or deductible.
That's a great point.
One thing that we should emphasizeas to why you refer to side
A coverage as sleep coverage.
The directors don't have to come out ofpocket, so it's why it's vitally important
(16:32):
that a company have D&O in place beforean individual director chooses to take
a board seat because they want to makesure they're covered in the event of a
claim, but they also want to make surethey don't have to come out of pocket
for the retention or a deductible.
So, if I am being asked to join aboard, it's good for me to check
that their D&O insurance is not onlycurrent, has adequate coverage, and
(16:55):
somebody has been paying the premiums.
That's correct.
Correct.
So, let's talk about the coverage,and particularly some of the claims
that are made, which some of thelisteners will be familiar with.
The first one to talk about is breachof fiduciary duty, and I think when we
talked previously, we talked about theBoeing case, because I think that was one
(17:17):
of the claims that was made against boardmembers in that case, and the other one
are so called Caremark claims, which Ibelieve are breach of the duty of loyalty.
Could you talk about those twoclaims and what they mean day-to-day
when you're sitting on the board?
Michael, I'll take this one, butfeel free to add in if you want.
Listen, the Caremark claim where thebreach of a duty of loyalty and care to
(17:38):
the corporation is a breach fiduciarycase where they're saying that the
board members have failed their dutyof oversight like Boeing or Wells
Fargo to oversee the corporation andmake sure the corporation has internal
controls and that the corporation isin compliance with those controls.
This is very important becauseshareholders, when they file a claim
(17:59):
saying that the board has failed inits oversight, they're saying that
the corporation has been harmed, bothreputationally and by other damages,
such as in fines or penalties, andtherefore has suffered monetary
damages, and they're looking at theboard to either call back money from
the board or pay for those damages.
That's where that side A coverage comesin, and these settlements are large.
(18:22):
The Boeing settlement was 237.
5 million dollars.
That was a claim against the board forfailing to oversight for the 737 MAX.
Wells Fargo was 240 million.
That was failure to oversight withunauthorized account scandal and
we just saw the Tesla 735 million,and that was more concerning boards
breaching their fiduciary duty interms of compensation plans so what
(18:45):
we've seen over these past few yearsare tremendous amounts of settlements
aimed at the boards for failing intheir oversight capacity to kind of
be independent and oversee the board.
One of the things that my formerCEO, Warren Buffett's saying is,
what did you know, when did you knowit and what did you do about it?
And that is what boards are being heldaccountable for is, what did you know.
(19:08):
Just like in the Boeing case, when didyou find out that there were issues
with this plane, and then what did youdo about it in terms of controls or
compliance or checking any red flags tomake sure that it didn't happen again?
That's really well explained.
I think that's great.
What about private companies though?
The suits you talked about, the claimsyou talked about are public companies.
(19:29):
Private companies get sued, board membersget sued for breach of fiduciary duty and
breach of the duty of loyalty as well.
Talk about those claims.
Yeah, I'll jump in just againfrom a high-level perspective.
It's so interesting because even thoughthe coverage is generally the same for
a private and public company, althoughthe policy forms are different, the
(19:52):
exposure is wildly different andthe premiums are wildly, wildly,
wildly different from one another.
What I would generally say to my clientsis that if you're a well-financed private
company, the risk of a D&O claim is verylow, but for all the reasons we talked
about; outside investor, an investor oran independent director, they're not going
(20:15):
to serve on the board unless there's D&Ocoverage in place regardless of the risk,
so you need the D&O portion of the policy,but what would actually respond most for a
private company is an employment practiceliability policy that covers claims
relating to sexual harassment, wrongfultermination, discrimination, and then
(20:36):
going back to the D&O piece for companiesthat are not well financed or not
performing well, that's when the risk ofa claim is the highest and honestly where
you need a really sophisticated broker toget coverage in the first place because
insurers like to see that a companyhas a fairly lengthy runway of cash.
(21:02):
Let's say that a company has lots ofcash and then runs into trouble, the
coverage obviously stays with the company,even though it's run into trouble.
Correct?
Absolutely.
If it were used on an annual basis,so if a company is well financed and
not in trouble in year one and inyear two, there's something indicating
that the performance of the companyis going the other direction, that
(21:24):
should be reflected in the premiums,but coverage should be available.
Knock on wood, I have not seen acompany not be able to get D&O coverage.
I think what you said was if acompany's performance is not going
well, coverage "should be available".
What are the situations in which for aprivate company it becomes unavailable.
(21:48):
I have not seen coveragebecoming unavailable.
It's sometimes very difficultand that's why my hair discolors.
You have to argue and fight withcarriers to get coverage, but
sometimes they may extend the policyand I can explain why that can put
a company in a difficult position.
If a claim has already arisen duringa policy year, it can compromise the
(22:12):
limit, and if a carrier then wants towait to offer coverage to see if they're
going to get financed, let's say, andthey extend the policy, that limit that
was supposed to be available for 12months gets extended for whatever the
extension period is, and then there'sno guarantee that the company is going
to be offered coverage in the future.
(22:33):
But what we see all the time is companiestelling carriers because it's a truth
that they're in the middle of negotiatinga round of financing or they have a term
sheet, so a signed term sheet is betterthan negotiating a financing and having
a deal closed, waiting for the money tohit the bank is better than a signed term
(22:53):
sheet, but depending on where you are inthe financing cycle, if you're struggling,
it can be difficult to get coverage.
Not necessarily impossible.
Are there cases in which you havebeen involved where you denied
coverage to a company that wasrunning into trouble financially?
In my career, I have not had a clientwho's been unable to get insurance.
(23:15):
Dereick, I don't know if you have.
Yeah, I would agree with Michael withthat, and just to be clear, as the broker,
we're going out pursuing coverage forthe clients, but the insurance carriers
are the ones who are ultimately goingto bind the insurance or not, and like
Michael said, the underwriters for thecarriers are very in tuned with all the
companies and all the different businessareas, so they're going to be looking
(23:38):
under the hood for all these companies.
But I do agree with Michael, if thecompany is solvent and can put forward
a business plan and financials, it'svery extremely rare that they wouldn't
be offered some type of coverage.
So, that's our job to try to maximizethe coverage that they would be able
to get and to make sure that if theydo have an event where there's a claim
(24:00):
and they need to access the coverage,that everything works as it should be,
and that the coverage would kick in.
The carriers may step in in a reallybad situation and say we're going to
exclude certain claims or we want tohire retention, or we're going to jack up
your premiums significantly, not to turnthis into an advertisement for Newfront,
but you do need a broker who is wellversed in situations, both representing
(24:25):
unbelievably successful companies, butalso companies that are struggling.
You need to have really strongrelationships with the carriers to
make sure that the coverage has somany holes in it that in a troubled
situation, there wouldn't be any realcoverage, even if a policy exists.
So, one of the things we talked aboutis where the highest premiums are
(24:45):
sometimes found, and the two areasyou talked about were science and
technology and cyber risk insurance.
Can you tell us a little about that, andeither one of you can jump in for this.
Sure.
Yeah, it's one area we focus a loton and unbelievably complicated is
product liability claims for lifescience companies that are involved
(25:08):
in clinical trials, and this was oneof the compelling reasons that my team
and I joined Newfront is that we havea technology platform, the only one in
the industry that I'm aware of whereour clients can go and obtain clinical
trial coverage through our portal.
They can access the portal to lookat country requirements to see what's
(25:30):
required, upload informed consents andprotocols, and next thing you know, it
automatically spits out a bindable quote.
Even though it might be easy to getcoverage, the more involved the company
is in the clinic, the higher pricethe policy is and the more robust
your life science program needs to be.
Similarly, with cyber coverage, really hotbutton area in the world of insurance now.
(25:55):
It's amazing how disinterestedboards are in certain areas of
insurance and how interested theyare in D&O insurance and cyber.
The amount of questions we get on cyberover the last three, four, five years,
as you can imagine, has just exploded,and it's really important that you
(26:17):
have a broker who can respond to prettyinterested directors in this area.
Let me ask this question.
If there's a cyber breach and personalinformation is suddenly available to
the public, is that a cyber insurancecoverage or could it also be a D&O
(26:38):
coverage for the failure of the boardto properly monitor and oversee the
protections that their company areproviding for this important data?
So, for that question, theanswer is yes, it can be both.
So, a cyber policy providesfirst-party and third-party coverage.
So, if there's a dissemination ofpersonally identifiable information,
(27:01):
personal health information, confidentialinformation, there's coverage for
the company for costs and expenses itincurs to provide notice, to hire a
forensics firm, to hire a legal expert.
There's third-party coverage if they'resued relating to the data breach,
and as Dereick can talk about, aD&O policy may respond if there is a
(27:23):
securities claim alleging a drop instock price because of the cyber matter.
Yeah, 100% correct, Michael.
What we're seeing, Joe and Raza, iswe're seeing this play out in real life
all the time now where just we're seeinglarger breaches, we're seeing business
interruption, we're seeing privacyactions brought on top of that because
(27:45):
of the leak of personal information,and then what we're seeing is a D&O
claim coming out of that, whether youlook at Equifax, whether it's a stock
drop related to the breach, and thenyou bring a suit, or maybe something
that Michael alluded to earlier wherethere's a policy in place that wasn't
properly overseen and we should have beenaware that we had these issues with our
(28:05):
cyber and that's what led to this loss.
And we've also seen now where a lotof boards are required to have a
cyber expert or our CISO on theirboard, just for this very reason,
because we've seen cyber losses leakinto D&O extremely frequently lately.
Speaking of the risk profile of differentcompanies, I know public companies have
(28:26):
a very different risk profile for D&Oinsurance versus private companies.
Dereick, I wanted to ask you aboutthe specific situations where an
activist shareholder gets involvedand comes into the picture.
What does that do to the D&O insurance?
Well, the D&O insurance, anytimean activist shareholder starts
(28:46):
sending letters to the board or acompany, we automatically notice the
D&O carrier because automaticallythere is now a cloud of potential
litigation around the company.
So whether or not it's a claim underthe policy of that first letter or
something that could be a circumstancethat could lead to a claim.
It's something that we want ourcarriers to be informed of because
(29:09):
as we've mentioned earlier, theseare all potential losses that could
affect the board of directors.
Basically, the activist shareholderis saying that you, the board,
the CEO who run this company,you're doing something wrong, and
this is what you should be doing.
So, those are potential wrongfulacts that could trigger coverage
under a policy, depending on how theletters are stated, and usually it's
(29:30):
one letter, which leads to another.
Definitely, those are things that wedeal with every day and things that
we involve our carriers with becauseto the extent that that demand now
becomes an actual claim and somethingwhere the company feels they have to
retain defense counsel to respond tosome of these activist letters, that's
something that typically is coveredonce the insurance brief is triggered.
(29:52):
Yeah.
Sounds like a great ideato have that coverage.
Michael, maybe switch to the costand premiums for this insurance.
I'm sure there's a range.
I'm sure it varies.
Give us just the kind of like just aballpark or let's say US-based insurance.
So, a couple of data points for a privatecompany for an early stage investor-backed
(30:16):
company tends to be when they would buyinsurance for the first time, they might
purchase a million dollars of coveragethat could be $3,000 out of the gate.
If they wanted more limit,it could be $15,000.
So, you're looking at a fairly tightrange for an early stage company.
As a company gets closer to an IPOor an exit we recommend that they
(30:37):
would have a minimum of $5 millionof coverage and the premium might
jump up to 50-ish thousand dollars.
If you're a unicorn with eyes to gopublic and big revenue, it could be
a couple hundred thousand dollars for5 to 20 million dollars of coverage.
Twenty million I think would behigh for any private company.
(31:00):
Conversely, when a company goes public,I always say the day before an IPO,
you might spend $40,000 of insuranceand then you start trading and your
insurance jumps up in the millions.
I mean, it's really a significant itemthat as a company is preparing for an IPO
at least 12 months in advance, they needto start thinking about budgeting for
(31:22):
an IPO, the process to get D&O coverage.
You have an underwriter meetingwhen you file a confidential s1.
You want to have nondisclosureagreements in place with the carriers
because there are no applicationswhen a company goes public.
There's a story that's told inan underwriter meeting and all
(31:42):
underwriting is based off of the S1and publicly available information.
So, it's a real game changer from acoverage standpoint and the premiums
might start around a million dollars withretentions or deductibles in the millions.
We would see a retention of twoand a half million dollars for
(32:03):
a company that's going public.
Well, one thing that's also veryinteresting when you look at where
claims are brought against publiccompanies, the risk of a D&O claim is
actually higher within the first threeyears of an IPO, so the cost of your
D&O insurance in any market, right nowwe're in a soft D&O market, so premium
(32:25):
should be dropping in some cases, very,very significantly, although there
are signs that the market is turning.
But if you're three years or moreaway from an IPO, your premiums
actually might be lower than they werewithin that window closer to an IPO.
And this underwriter meeting youmentioned, sounds like this is where
(32:45):
a broker like Newfront can reallymake the difference and prepare
the client with the proper contextto have an effective meeting.
Absolutely, and one of the things that Ilike to say is when a company is getting
ready to go public or negotiating apublic policy, they've been public for
(33:05):
a long time, the person negotiatingcoverage on their behalf is not me.
I manage the relationship withclients, but we have experts
with deep, deep experience.
The person who my colleague, JamesCiarleglio, who runs our Northeast
D&O practice ran AIG's D&O practice,so he has years and years under his
(33:27):
belt as an underwriter so he cansit with management teams as they
prepare for this underwriter meeting.
to alert them to what the carrierswill be most interested in an
underwriting meeting, give guidance onhow to present financial information.
If a company is involved in clinicaltrials, this is one thing we do all the
(33:48):
time to share a story about the drug andwhere they are in the clinic and results.
So, telling the company story Is sovitally important and having some
who sat on the other side of thetable from that perspective is really
hugely valuable when you're preparingfor that very important meeting.
(34:09):
When you're spending millions, we alwayssay to our clients do not underestimate
the importance of that meeting.
Michael and Dereick, the final questionI wanted to ask you was your top one or
two tips to boards for practices thatlead them to avoid trouble with D&O.
(34:29):
My advice would be to listen to yourlawyers and when there are questions
about what to disclose or not todisclose, it's really important
to listen to your legal team.
One of the things that has made me Ithink successful in this career is how
much I respect companies' legal teams,and they're just absolutely invaluable.
(34:53):
And Dereick?
Yeah, I think that's a great point.
And along those lines, obviously,number one, know your insurance and
your broker, and ask them any questions.
But along the lines of what Michaelsaid, especially when you're dealing
with a board dealing with transactions,anything like that, make sure that
you're getting fair opinions and thatyou are doing everything by the book.
(35:15):
I mean, take your time.
One of the most frequent things wesee is that there was a rush to get
something done and we skipped oversteps two, three and four, just to
close the deal or to make it happen andthen we see the litigation come shortly
thereafter, so that would be my tips.
But I think they all fall in line withjust trust your lawyers and make sure
(35:36):
that you're doing everything by the book.
How about doing your job?
So, putting the lawyers aside, if youlooked at something like the Boeing
case, Silicon Valley Bank, the questionreally became is where was the board?
That's not a lawyer issue.
That's a board issue.
The board may not have, and I don'tknow the details, but the allegations
(36:00):
have been in these cases, that the boardreally did not act when it needed to.
So back to the question, what shouldboards do or what can they do before
the lawyers are involved to dotheir job in a way that might help
them avoid the kind of D&O coverageclaims that we've been talking about.
(36:25):
I think it is what Bill Belichick said.
Do your job.
One thing that I would recommendand we've talked with you guys about
this is as we're leading up to this,I think diversity of opinion and
backgrounds on boards is critical.
A well composed board goes along way in decision making
and helping you do your job.
(36:46):
Absolutely.
Dereick, you agree with that?
I agree with it a 100%, and that'ssomething that we've seen obviously a
big top of an issue lately, but In termsof practice now plays out, I think the
diversity of thought is something that awell constructed board is usually one that
has a lot of different diversity in termsof thoughts and the members on that board.
(37:08):
Michael and Dereick, it's beengreat speaking with you today.
Thanks so much for joining us.
was a lot of fun guys.
Thank you very much.
Joe.
Thanks.
And thank you all for listeningto On Boards with our guests,
Michael Talmanson and Dereick Wood.
Please visit our websiteat OnBoardsPodcast.com.
That's OnBoardsPodcast.com.
(37:31):
We'd love to hear your comments,suggestions, and feedback.
And if you're not already a subscriber,please be sure to subscribe at
Apple Podcasts, Spotify, or whereveryou get your podcasts and remember
to leave us a five-star review.
Please stay safe and take careof yourselves, your families, and
your communities as best you can.
(37:52):
We hope you'll tune in forthe next episode of On Boards.
Thanks.
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