Only 14% of D&Os understand cover

Risk managers should help directors and officers better understand their D&O insurance cover, according to a report from Airmic and AIG.

The results of Airmic’s annual survey suggest that further work is needed to ensure directors and officers are aware of the evolving threats they face and insurance they have in place. Only 14% of Airmic members were confident that their directors had read and understood their D&O policy.

“Given the potentially significant costs and serious personal impact of a D&O claim, if something goes wrong with the insurance coverage, the relevant director will be coming to the risk manager for answers,” AIG states.

Only 18% of Airmic members responding to the survey believed their directors were aware of their personal liabilities under D&O cover. This suggests a perception of complacency among board members that an investigation or action will not happen to them, says AIG.

Another common confusion is over how director defence costs are prioritised. More than a quarter (28%) of Airmic members said there is no clear process in their organisation for who gets paid first under their D&O policy, while a further 32% did not know.

Exposures for directors and officers are increasing from both traditional and emerging threats, as well as so-called event risks like #MeToo, or sector-wide scandals or misconduct.

But only 11% of respondents to the Airmic survey believe that their directors understand their liabilities in relation to Brexit. And, while 68% of Airmic members cited data security as a top threat of concern to their boards, just 59% believed the board is aware of the scope of D&O liability cover for General Data Protection Regulation issues.

“Directors need to guide their businesses through this ever-changing landscape and any false move can lead to accusations of mismanagement. Even if the board has done nothing wrong, refuting accusations or responding to regulatory inquiries can take up management time and result in unexpected legal bills,” AIG says in the report.

Although directors and senior managers face emerging risks, they, and their risk managers, must also keep eyes on more traditional threats, the report continues.

“While risk managers should be aware of emerging threats to senior members of their organisations, the traditional sources of claims against directors, such as misstatement in financial reporting, bribery and other forms of corruption, and breaches of fiduciary duty, continue to be the focus of the plaintiffs’ bar, prosecutors and regulators,” AIG says.

Increases in D&O exposure and a trend toward increased severity of D&O claims is helping drive changes in coverage for UK companies, according to Noona Barlow, head of international financial fines claims at AIG. This includes increased premiums, reduced capacity or increased deductibles.

The UK has seen an increase in the costs of anti-bribery and corruption investigations by the Serious Fraud Office (SFO), as well as corporate insolvencies and accounting scandals.

Given the increased severity of claims and emerging areas of D&O exposure, higher premiums are likely to feature for the foreseeable future, said Ms Barlow.

She said buyers need to determine their strategy and priorities when buying a D&O policy.

“Some buyers will prioritise balance sheet protection in the event the company is sued. Some companies will only buy Side A or treat it as only Side A for the main board in a catastrophic event. Identifying and communicating the strategy from the beginning will avoid confusion when a claim arises,” she said.

Companies may also be underestimating defence costs and therefore limits. The costs associated with an SFO investigation are hard to predict and can quickly escalate.

Some 45% of Aimic members believed that the average per director defence costs will reach £1m, while a similar 44% thought it would be less than that. However, the average defence cost per director in an SFO prosecution is £4m, although it can go higher, according to AIG.