D&Os face peak litigation risk in 2021, warns AGCS

Litigation risk facing directors and officers (D&O) has reached a new high with Covid-19 and its economic fallout adding to the growing list of exposures, warns Allianz Global Corporate & Specialty (AGCS) in a new market report. Higher numbers of insolvencies following Covid-19, cybersecurity and environmental, social and corporate governance (ESG) scrutiny are driving an increase in exposures for D&Os, who are being held accountable for performance or management decisions, AGCS says. The pandemic has also battered an already bruised D&O insurance market, AGCS warns. Markets in Australia, the UK, the US and parts of Europe have recorded underwriting losses for the past few years. While the market had begun a correction at the start of 2020, any gains were quickly undone by the pandemic. “Many insurers are still digesting the effect of previous pricing inadequacy and exposure and loss trend increases from prior-year policies,” commented Shanil Williams, global head of financial lines at AGCS. Mr Williams added that there is “a lot of nervousness” in the D&O insurance sector. In particular, insolvencies are expected to rise. Insolvencies are traditionally a key driver of D&O claims as administrators look to recoup losses from directors. Euler Hermes predicts record high global insolvencies by the end of 2021. They are forecast to rise in several European countries including the UK, Italy, Belgium and France. “The impact of the gradual phasing out of temporary policy measures designed to support companies is one of the key concerns for 2021,” said David Van den Berghe, global head of financial institutions at AGCS. AGCS says the number of class actions in the US is on track to match 2017 and 2018, despite the slowdown caused by the first wave of Covid-19. At the same time, AGCS says the percentage of new filings in 2020 targeting foreign-domiciled US-listed firms is nearly twice the average of recent years. Half of these are against Asia-domiciled companies. Securities class actions are also being filed in record numbers outside the US, AGCS says. “The landscape for collective redress in Europe has evolved over the last few years and collective action is a growing exposure,” the report states. The first class action lawsuits related to Covid-19 have started to come through. There are claims against cruise ships that suffered outbreaks of the virus at the start of the pandemic, and litigation against firms for Covid-19-related performance. Next year, companies will also need to be alert to event-driven litigation triggered by issues such as inaction on diversity and poor sustainability performance, as well as underestimating or misrepresenting Covid-19-related risks., warns AGCS. “Social justice protests, activist investor campaigns or money laundering schemes could all develop into litigation trends, as could single catastrophic events such as a plane crash or the California wildfires,” said Joana Moniz, global head of commercial financial lines at AGCS.

D&Os face peak litigation risk in 2021, warns AGCS

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