The Current Market
Policyholders currently face an increasingly hardening market in terms of obtaining D&O insurance. The pricing of available cover is continuing to increase in circumstances where the terms of the cover being provided are also becoming increasingly limited. This hardening of the D&O market has been taking place for many years due to a number of reasons explored below, and which policyholders should consider with their broker on policy renewal.
Increased Director / Employee Claims
There has been increased scrutiny ofthe way business is carried out and corporate governance of workplace standards in recent years. Directors and Officers are being held to a higher standard than before and are increasingly held accountable for the failings of any given business. This makes them the target of more claims, and insurers are having to pay larger sums in restitution and Defence Costs more frequently. In a world which is increasingly focused on accountability, insurance for large corporates and their Directors and Officers is ever more important, yet difficult to source.
There has also been an increase in litigation brought by major shareholders not personally represented on company Boards, and by activist shareholders. These risks have also contributed to the changes in D&O risk profiles.
Recent examples of Directors, Officers and employees being held accountable for the actions of the wider business include the following:
- Boeing 737: A US Judge recently ruled that Boeing's board of directors must face a lawsuit from shareholders over two fatal crashes involving its 737 Max plane. The Judge ruled that the first crash was a "red flag" about a key safety system on the aircraft "that the board should have heeded but instead ignored". The Judge went on to note that the real victims were the crash victims and their families but investors had also lost billions of dollars.
- Facebook: Frances Haugen has recently identified herself as a whistle-blower against the company. As a result of her former role as product manager on the civic integrity team, Ms Haugen has recently testified before a Senate subcommittee in a hearing titled "Protecting Kids Online", about the company's research into Instagram's effect on the mental health of young users. Additionally, one of Ms Haugen's leaks showed that Facebook was also facing a complex lawsuit from a group of its own shareholders. The group alleges, among other things, that Facebook's $5bn (£3.65bn) payment to the US Federal Trade Commission to resolve the Cambridge Analytica data scandal was so high because it was designed to protect Mark Zuckerberg from personal liability.
- #MeToo: The movement has highlighted the widespread prevalence of sexual assaults and harassment in the workplace. The issue is particularly prevalent in senior parts of businesses, which has led to increased Director and Senior Executive exposure either through being directly involved in the claim or complicit in historic alleged "cover ups". The movement has therefore led to an increase in the number and size of employment practices liability (EPL) insurance claims (which is insurance often purchased with D&O cover in order to allocate the majority of the premium to the EPL cover).
Ways in which insurers have been known to try to counter such increasing exposures include the following:
- Adding higher, separate retentions for certain types of claims e.g. those of sexual harassment or for EPL generally.
- Including specific and broader exclusions in policies, such as sexual battery / sexual molestation exclusions to policies.
- Removing coverage for any matters brought by major shareholders if they do not have board representation.
- More stringent exclusions relating to deliberate dishonesty.
Increased Emphasis on Diversity
Private companies are also facing increased shareholder and regulatory scrutiny through allegations of failing to meet promised commitments to diversity and inclusion. Discrimination claims are increasingly prevalent.
There is potential for claims to be made directly against Directors or Officers for breach of fiduciary duty when Boards fail to monitor compliance with anti-discrimination laws. There is therefore now an increased expectation from not only employees but insurers that companies prioritise diversity and inclusion in their internal policies and that they show that they do, in fact, adhere to those policies.
The Impact of Covid-19
Increased redundancies as a result of the Covid-19 pandemic have also seen a rise in claims by former employees. Such claims could include allegations of discrimination and harassment. Whilst companies can provide themselves with some protection through internal policies, such as those addressing health risks / vaccinations amongst staff, there will inevitably still be some exposure.
There may also be increased exposure for Directors and Officers to claims from employees, consumers and suppliers with regards to a company's response to the pandemic. For example, we are seeing this in relation to care homes and other organisations within the care sector.
A further unfortunate impact of Covid-19 has been an increased number of bankruptcy filings for companies. When private companies file for bankruptcy protection, secured and unsecured creditors often make claims of misrepresentation and breach of fiduciary duty against them and their Directors and Officers. Such breach allegations can include engaging in transactions for personal benefit at the expense of the company and causing the company to become insolvent through gross mismanagement.
Insurers are aware of these increasing exposures and are therefore trying to reduce the risk by including policy exclusions such as creditor and/or bankruptcy exclusions for financially distressed risks.
In order to counter some of these potential exposures, Directors and Officers should ensure that the non-indemnifiable coverage provided as part of larger entity programs carves back coverage for them if insurers include any sort of bankruptcy exclusion. Standalone Side-A coverage to protect the personal assets of Directors and Officers will also be key.
Advice for Policyholders
In an increasingly hardening market, the options for cover for policyholders are becoming limited. It may be that, in time, the market prices itself out of business, as has been the case for a number of insurers in the pharmaceutical sector, where a number of businesses now self-insure or insure through captives due to the increasing premium paid despite the lack of indemnification for large claims. This is a sector issue, especially for larger organisations which need to attract and retain the right individuals to sit on Boards and to head operations. Without sufficient responsive cover, executives may be unwilling to expose themselves to increased scrutiny and risk.
In the short term, however, there are a number of things that policyholders should try to negotiate within policies to provide the most protection for their Directors and Officers in such an increasingly litigious environment. Such steps can include the following:
- Companies should look to modelling to assess the likelihood and severity of any D&O claims. In circumstances where the likelihood of a claim is low, this should be leveraged with insurers. The company's risk profile exposure should be looked at in isolation, rather than being grouped with a market where there is increased risk exposure generally.
- Policyholders should also work with their brokers to try to produce creative solutions regarding potential retentions and the distinction between certain risks to obtain more competitive pricing for cover, to ensure that the full value of the D&O programme is reached whilst retaining the correct level of cover.
- Risk Managers should also review the policy terms extensively and consider the viability of any exclusions. For example, companies should try to avoid major shareholder exclusions, as this is a precise area of risk that many D&O policies are intended to cover. This may, however, not always be possible, so an alternative would be to request that the insurer increases the specified ownership percentage to a higher level than 5%.
- Companies should also put policies in place and enforce those policies to ensure that the policyholder reaches the standard required, whether it be in diversity and inclusion or general oversight and management of any significant issues that are impacting the company at that time. High levels of adherence and strong corporate governance is critical.
In the event that you do have any queries about your current D&O cover or any claims which you are proposing to bring under your D&O policy, please contact Sonia Campbell or Sophie Fairclough in our Insurance Team, who will be able to assist with any policy specific issues. We specialise in advising corporates and Senior Executives in relation to regulatory investigations and claims.