Emerging Trends in the Directors’ & Officers’ (D&O) Liability Landscape
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Written by Stelios Miltiadou, Chartered Insurer
Directors’ & Officers’ (D&O) Liability Insurance has come a long way since it was first introduced in the wake of the Wall Street Crash of 1929. However, this type of insurance is not, unlike some other types of commercial insurance contracts, compulsory and many companies choose not to take out this type of cover. In fact, industry reports and surveys show that directors and officers are not aware of the liabilities they are exposed to, with their own personal assets at risk.
The Road to Re-Regulation
The shift from deregulation to re-regulation due to regulatory failures such as Enron, WorldCom, Tyco and the Global Financial Crisis of 2008 have resulted to an attempt towards internationally driven regulatory supervision with cross-border cooperation.
Accountability is shifting towards management with an increase in costly investigations, and executive duties have expanded to other areas such as oversight of risk management and internal controls.
Corporate scandals such as Petrobras in Brazil, Volkswagen in Germany and Tesco in the UK show that there are tremendous regulatory flaws, resulting to an even stricter regulatory environment. The pattern is clear, as corporate governance evolves, D&O exposures increase.
The Rise of Shareholder Activism
Another concern is the rise in litigation against directors and officers due to the trend towards shareholder activism and most importantly, the legal reforms across the globe which are gradually shifting jurisdictions towards adopting US-style class action lawsuits.
In the US one of the most significant D&O severity risk is the potential class action lawsuit under US securities laws. The case of Morrison v Australia National Bank (2010), limited extraterritorial securities litigation in the US. Consequently, this been a major driver for the rise in class actions in other jurisdictions, such as the Netherlands and Australia.
Moreover, many argue that the UK is far from but gradually shifting to US-style class actions due to the civil justice reforms, the rise in third party litigation funding, the new Consumer Rights Act 2015 and the first expected high profile class action lawsuit against MasterCard.
SMEs and Underinsurance
There is also a concern that SMEs are underinsured or even not insured when it comes to D&O Liability Insurance.
According to the European Commission, SMEs constitute 99% of all businesses in the European Union. Yet, studies have shown that only 30% of SMEs have D&O Liability cover.
SMEs are facing increasing exposures and are realising the need and value for D&O Liability Insurance.
There is an argument that SMEs are just as exposed as their larger peers. In fact, SMEs face greater financial risks since they do not have an in-house legal team to help manage a claim or investigation against them nor in-house HR and Risk Management departments.
Recommendations
The biggest issue in relation to the demand in D&O, is clearly education. One of the main reasons D&O insurance is not as popular as it should be, is the fact that directors and officers are not aware of the liabilities they face. Perhaps, a solution is to ‘professionalise’ directors and officers, in a sense that before taking the position of a director or officer, there should be appropriate training with mandatory professional qualifications.
From a Risk Management perspective, companies and management should regularly review D&O coverage and make sure there are no gaps in coverage. Directors and officers should more frequently call on their insurance brokers and consultants to evaluate the adequacy of their company’s D&O insurance, looking for assurances that their coverage is as broad as possible with adequate Limits of Liability.
Views expressed by the author.
