Navigating today’s business environment is a mammoth task. Tightening regulations, newly surfacing technologies, increasing shareholder activism, intensifying class action litigation activity, escalating merger objections and IPO activity and rising levels of public and governmental scrutiny, are all challenges for corporate directors and officers.
In addition, there are emerging risks such as data breaches, cyber-attacks, climate change and even human slavery in the global supply chain, which can also drive claimants to bring legal proceedings against officers or boards.
Personal accountability has been a major concern since the 2008 financial crisis and continues unabated. Whether it’s the general public, the media, investors or the government, executives are increasingly being held personally responsible for their actions, decisions and conduct.
As a result, company directors and senior managers globally face a real and growing threat of legal and regulatory liabilities. If things go wrong, they are increasingly likely to face costly regulatory investigations, criminal prosecutions or civil litigation, putting their personal assets and liberty at risk.
With an Eye on What Boards Should Watch in 2019
The environment and landscape in which Directors &Officers navigate daily is becoming both more complex and riskier. The regulator, investor and public expectations of boards continue to intensify, while personal accountability for failing to meet these expectations is increasing. The shift from corporate to personal responsibility, shifts steadily. When these expectations are not met, the propensity to litigate is now ignited by the further emergence of collective actions, increased capital flow into shareholder activism and the growth of litigation funding, which is now seen as an alternative asset class producing high returns.
- Emerging Risks
A failure of boards to recognize, manage and mitigate a number of emerging risks will result in both personal liability and securities claims. These include managing company cyber risks, protecting intangible assets and reducing intangible liabilities, protecting brand and reputation value and addressing climate change disclosures.
- US Securities Litigation and the Cyan Decision
In the US, securities class actions had a record year in 2018 and the Cyan case, which disrupts a securities litigation system that Congress and the Supreme Court have been developing over the past 85 years, will bring more cost to IPO litigation. IPOs are a consistent target for securities class action litigation. Adding to this dynamic is the recent decision in Cyan v. Beaver County Employees Retirement Fund. In this case, the U.S. Supreme Court unanimously decided that federal class action lawsuits brought under Section 11 of the Securities Act of 1933 could be brought in all state courts. As a reminder, Section 11 means public companies are strictly liable for material misstatements in their S-1 registration statements, making newly public companies an easier target. The reason the Cyan decision is significant is because there is typically a lower dismissal rate for Section 11 claims in state courts compared to federal courts. Merger objection claims have additionally hit all-time high.
- D&O Lawsuits Continue to Follow Revelations of Sexual Misconduct
As revelations of sexual misconduct have continued to unfold around the globe, the accountability process has come to include not only efforts to hold wrongdoers liable, but also efforts to hold boards and corporate management accountable for permitting the behavior or turning a blind eye. There have now been a number of management liability lawsuits filed in the wake of revelations of sexual misconduct, relating to a number of household companies including 21st Century Fox, CBS, National Beverage Corp., Wynn Resorts, Teladoc Health, Nike Corp. With the increased focus on sexual harassment in the news, an increase in sexual harassment claims and lawsuits is inevitable.
- Event-driven D&O claims are dramatically on the rise
They can trigger from anything like missed earnings, product recall or liability-based issues and operations oriented situations, as well as claims generated from cyber breaches and sexual harassment or discrimination. The logic of the plaintiff attorneys is something along the lines of the directors and officers having initially installed more procedures/protocols to address these situations in a way that the company reputation/stock would not be affected. And while these types of cases may be harder to prove, the new plaintiff attorneys are constantly testing the waters.
- Uncertainty around the Old World
In the UK and across Europe, a continued trend towards more collective redress regimes and more intense personal liability scrutiny from regulators and their own companies. Uncertainty surrounding Brexit creates additional decisions for boards to make in how their European operations will look in future. The newly-introduced General Data Protection Regulation (GDPR) brings additional boardroom responsibility on managing cyber risks.
- Difficult Environment for D&O Insurers
Many of the current claim’s trends represent particular underwriting challenges for the insurers. In the past, D&O underwriting was focused almost exclusively on reviewing and assessing applicant’s financial statements. But many of the emerging claims trends do not relate to companies’ financial condition or even their financial performance. An applicant company’s potential exposure to claims arising from data breaches, privacy concerns, sexual misconduct allegations, climate change, or social media practices in most instances cannot be discerned from reviewing the company’s financial statements – indeed, those kinds of exposures may not be susceptible to being underwritten at all. At a minimum, the traditional approach to D&O underwriting may no longer be sufficient.
- Cross-border trade
Cross-border trade, supply chains and international co-operation of regulators continue to make defending and settling D&O claims more complex and costlier. At the same time, global rules surrounding trade are in flux and navigating this environment is a constant challenge for management.
- International Programs
International Programs are growing in popularity and need, as cross-border risks evolve, with increasing collaboration among regulators, insurance and tax entities. Ensuring the D&O insurance policy is fit for purpose in the local market can be crucial at the time of loss. This is of critical importance when a non-indemnifiable claim is made against a director in a country where non-admitted insurance is not allowed.
- Claims Costs
Claim teams and legal counsels will increase in value as D&O exposures evolve and increase. Experience is critical during these “moments of truth”. We see a trend of relationships being built pre-loss as part of an overall D&O risk mitigation strategy.
D&O market continues to evolve
D&O exposures are increasing as companies grow in size and international reach, and the environment for directors and officers to navigate has become more treacherous. With exposures increasing materially, so will the frequency and severity of D&O claims.
From an insurance perspective, we continue to see an increase in international programs, a need for higher capacity and more focus on stand-alone Side A capacity. Companies are also buying standalone cyber, M&A and reputational covers to supplement D&O and address issues of executive concern.
D&O insurers try to protect themselves from these emerging risks by charging higher premiums, sufficient to compensate for underwriting uncertainty. Many insurers are now openly saying that they will be pushing for rate increases, across the border.
It is essential for all Boards to be well versed in the above dynamics so that they understand the most efficient renewal strategies to be applied to this challenging environment.
At EXL Consulting staying abreast of the current trends is our responsibility and duty in order to best protect you, our Client, your business and your profits by providing timely information as well as cost-effective solutions to your insurance needs.