Javesh Ramcharan, Senior D&O Underwriter: AIG
Drawing on the Board Directors’ Guide to D&O Liability Insurance, Javesh Ramcharan, AIG Senior D&O Underwriter outlines five key areas that shed light on the major risks faced by company directors globally in a rapidly evolving and highly unpredictable business environment.
With tumultuous times persisting into 2021, it’s worth taking a closer look at the Directors & Officers insurance claims landscape through the lens of the Board Directors’ Guide to D&O Liability Insurance. Produced by Board Agenda in partnership with AIG, the Report outlines five key risks in the claim’s environment – and by implication, these are the five major risks faced by company directors today and in the near future. While some are expected, others are not – and included in the latter category is the continued impact of the #MeToo scandal which demands attention and sensitivity from every company director.
It is a traditional source of D&O claims, but the uniquely uncertain near-term economic and political outlook means this source of liabilities is set to increase. Prior to the pandemic, insolvency rates were already on the up in Western Europe and North America due to slowing global trade, political threats such as Brexit and trade wars between the US and China. Now multiple sectors – including automotive and retail – are under pressure from technology disruption, changing consumer behaviour, climate change concerns and competition. When companies fail, questions are asked about the actions and decisions of directors. Recent high-profile insolvencies have resulted in escalating regulatory scrutiny, and aggressive targeting of directors by administrators and creditors seeking to recoup losses.
Cybercrime is here to stay, presenting relatively easy money for criminals. Such incidents have resulted in multiple D&O claims in the US with investors pursuing directors for perceived shortcomings which have resulted in losses. With data and IT infrastructure being vital to all trade, and the tightening of cyber and privacy liability laws, investigations and lawsuits are likely to increase. In the wake of a cyberbreach, consequences for directors can include shareholder class actions where they are perceived to have failed in their duty to manage the risk, such as ensuring proper security controls or backups were in place and up to date. There have been cases where companies and directors have been sued for their failure to disclose cyber risks, such as GDPR exposures. So-called “fake president and CEO impersonation fraud” is another related threat that has led to D&O claims, whereby employees and executives have been tricked into transferring funds to criminals’ accounts.
CLIMATE CHANGE AND ENVIRONMENTAL CLAIMS
Interest in climate change risk is rising, from investors, regulators and various interested parties, and directors are increasingly expected to consider and mitigate climate and other environment-related risks. Several cases have emerged in the US where claimants sought damages from energy companies accused of contributing to global warming and some environmental disasters, including mining dam failures in Brazil and wildfires in California, have resulted in large D&O claims. Investors may also seek compensation for a company’s failure to adapt to climate change or to adequately disclose environmental risks. Activist groups in the UKand Australia have filed complaints against financial services firms alleging they had failed to comply with climate change reporting requirements. In 2019, the UK’s Prudential Regulation Authority applied new rules that require certain financial services firms to nominate a senior manager responsible for identifying and managing financial risks from climate change.
#METOO AND SOCIETAL RISKS
With increased personal accountability, changing attitudes and the rise of social media, directors today face claims related to employment related risks, ethics, and culture. Directors may face prosecution or civil litigation where they fail in their duty of care to employees or where they preside over a toxic corporate culture thatpermits abuses. Allegations of sexual misconduct, bullying and discrimination delivered a spike in employment practices liability claims in the US; derivative class actions have been filed against boards of corporations alleging dereliction of duty over misconduct or inappropriate workplace relationships.
The potential for employment liability-related D&O claims is not limited to the US. In France, for example, a group of former senior executives at a major telecommunications company went on trial in 2019 accused of “moral harassment”, after a wave of suicides following company restructuring and job cuts in 2006. In the UK, the introduction of gender pay gap reporting could create a potential liability for directors that fail to take action to address any disparities.
MERGER OBJECTION LITIGATION
Merger objection litigation has increased in recent years, to the point that most M&A transactions involve a lawsuit, often filed within days of deal announcements. According to Cornerstone, eight in ten mergers resulted in shareholder litigation in 2017 and 2018. Some 39% of all US federal court securities suit filings in 2019 were merger objection lawsuits, while 7% involved initial public offerings. Plaintiff lawyers and investors are aggressive in pursuing claims against directors, often alleging misleading prospectuses or because they are chasing governance changes. While many M&A claims are ‘nuisance lawsuits’ and are dismissed with or without settlements, defending them is relatively expensive and D&O insurers are often the ones footing the bill.
Given the risks faced by directors today – and given that some are well-recognised, while others are evolving with changing business and societal attitudes, board engagement with D&O risk and insurance has never been more important.
By keeping abreast of the risks that lead to claims, directors are better equipped for productive engagements with risk managers and brokers, providing an optimal opportunity to source appropriate D&O cover in mitigation of their overall threat landscape.