The Collapse of Silicon Valley Bank demonstrates the need for D&O Insurance
The collapse of Silicon Valley has direct implications within the insurance industry. Karen Allen Managing Director of GRP’s London Market broker Lonmar examines the impact of the SVB collapse on the D&O insurance market, and the exposure of company Directors to personal claims following an insolvency.
The collapse of the Silicon Valley Bank
On Friday 10 March 2023 SVB was shut down by US banking regulators. The Tech-focused lender failed to raise new capital after facing $42bn (£33bn) in deposit outflows. Customers raced to withdraw their funds, which compromised of a quarter of the bank’s total deposits.
The instability within the financial markets which started with the collapse of SVB has been exacerbated by the collapse of Signature Bank which was closed shortly after the collapse of SVB.
Litigation against SVB executives following the collapse.
When a bank collapses, it is almost inevitable that there will be lawsuits against the institution’s leadership resulting in Directors & Officers insurance claims as companies and shareholders try to recover their losses.
A few days after the collapse, an investor lawsuit was filed against SVB Financial Group CEO Greg Becker and CFO Daniel Beck, accusing them of making misleading statements about the company’s business and operations. The lawsuit from shareholders is seeking unspecified damages
As reported in the Insurance Insider SVB had a Chubb led D&O program with limits of USD180m. It is understood all Insurers on this program are on notice and it is possible that the entire limit of liability will be expended responding to claims made against SVB.
Insurance implications of the collapse
The risk to insurers is that further bank failures could lead to a rash of lawsuits. The most significant claims will be on the failed bank’s Directors and Officers (D& O) insurance which covers defence costs for the failed bank’s executives. We are also likely to see employment practice liability (EPL) claims from employees who lose their jobs, and possibly Professional Indemnity E&O claims, which could be taken out against the bank’s advisors (for example lawyers and accountants) on the basis that poor legal or financial advice contributed to the bank’s downfall.
Market outlook
The US Treasury, and Federal Reserve announced a plan to contain the Silicon Valley’s Bank (SVB) failure and HSBC UK and Goldman Sachs have acquired SVB’s UK subsidiary, calming fears of a financial meltdown like that of 2008, however, these failures could nevertheless still affect the financial lines insurance market.
Karen Allen, Lonmar’s Managing Director for Financial & Specialty, has commented:
“It’s almost three months since the collapse of SVB and Signature Bank. We have been keeping a close eye on the London insurance market to determine if the recent financial tremors have caused any effects – insurers retreating with reduced appetite or even withdrawal from certain areas. It’s fair to say there’s a level of caution and relevant skepticism but not to the extent at this moment in time, that it has affected terms we can achieve for our clients.
After the rapid hardening of D&O rate around 2019, we have experienced one of the most dramatically softening market cycles over the last 12-18 months for D&O. There is an abundance of capital from many new entrants and claims notifications from the US bank collapses have mainly hit the US insurance market, not effecting the London market (as yet), so for now, we still have a highly competitive market available for D&O.
Whilst the purchase of D&O insurance is ubiquitous for banks, many companies do not purchase this vital cover leaving their Directors exposed. The ongoing law suits associated with the SVB collapse highlight the vulnerability of company directors to personal litigation in the event of insolvency. This exposure is present for any Director irrespective of the size or sector of their business. Given the scale of costs and the potential for significant damages which can be awarded, we would encourage all businesses to consider protecting their senior teams with D&O cover.
For further detail regarding the market impact of SVB’s failure on the insurance market, see the Lonmar web site blog here