At a global level, there has been a worsening claims environment for directors’ and officers’ (D&O) liability ever since the financial crisis, and the current situation reflects a significantly more challenging regulatory and legal environment than in the past. Regulators and policymakers around the world have focused their attention more and more on directors and officers in their efforts to improve corporate behaviour, driven by public and shareholder pressure in the wake of the financial crisis. Enforcement agencies have prioritised individual responsibility in the face of corporate wrongdoing, and have repeatedly promised to come down harder on offenders.
As individual accountability and responsibility have come increasingly into focus, regulators are more often looking beyond the corporate legal entity to the actual or alleged individual wrongdoers and as a result, directors have more ‘skin in the game’. At the same time, there are record levels of securities class actions, and collective redress is spreading globally, together with the rise of litigation funding.
There are two important themes here. Firstly, traditional finance-related and regulatory-based D&O claims, such as those alleging misrepresentation of financial statements or inadequate disclosures, or claims arising from regulatory actions, have become more cross-border, and more systemic. With this globalisation of claims, we have noticed an increase in frequency and severity impacting the cost of D&O claims, both with respect to defence costs and to settlements.
Secondly, we are seeing new emerging risks like cyber-attacks, data breaches, violations of privacy and confidentiality, social engineering fraud, as well as environmental damage and climate change-related events. These risks directly relate to the increased personal liability of directors for corporate conduct and behaviour, as well as their duty of care towards the company and their shareholders, and the duty to supervise the implementation of appropriate compliance and risk management frameworks and resilience plans for these new risks and exposures.
D&O liability is becoming increasingly global and therefore more complex. Multinational companies are exposed to litigation in different jurisdictions for disclosures they make, or for corporate conduct. Public companies may have listings in different countries. One event, corporate conduct of any sort, can give rise to investigations by different regulators which are now sharing much more information across borders. This can then lead to local lawsuits in separate countries and an increase in internal investigations by the company itself.
With actions arising from the same underlying cause or wrongful act taking place in different jurisdictions, and in some cases multiple settlements being required or fines being levied, the frequency of large losses, and their severity, is significantly higher.
The development of these costs is certainly more difficult to monitor and manage as multiple parties are involved with different budgets and objectives. There are also possible conflicts of interest between individual insured persons, the insured company, the insurance carriers and even the insurance brokers. This can lead to a quicker erosion of the limit of liability, a more complicated litigation scenario, and a reduced ability to manage the claim and protect the individual directors and officers.
Due to this globalisation of claims, it is becoming more and more important to have an international programme in place, with local policies in place that can respond in the appropriate manner. Within international programmes, we are seeing local policies being triggered more often (and sometimes more than one) than in the past.
What are the important elements of a D&O international programme? First of all, it is important to have local policies in place to be able to respond immediately, especially where the company is not allowed to indemnify the director in the local jurisdiction. It also requires an experienced claims team that understands the ‘rules of engagement’ in the local environment and is able to properly advise all the stakeholders.
Also key is to work with an insurer with a broad network to cover as many jurisdictions as possible, and with local claims teams who have a deep understanding and specialism in D&O litigation.
It is crucial to have the requisite level of experience in handling these types of claims, which can provide the required speed of response. Local teams must be empowered to make decisions, but in full coordination and alignment with the underwriting and claims leadership teams of the producing country – providing our client an essential global view.
Lastly, an international programme must provide broad, up-to-date and consistent policy forms, to avoid as much as possible any gaps or conflict between the master policy and local policies, particularly in jurisdictions where reliance on DIC language from the master policy is not allowed or available.
Directors and officers are facing more regulatory enforcement actions, more investigations by their companies, and a growing list of new risks or threats that affect the role of directors and introduce new responsibilities in areas of risk management, compliance and corporate governance. And at the same time, the risks and claims are becoming more global and interconnected. In such an environment, an international programme from an insurer with a global footprint and considerable experience in D&O liability is more important than ever.
By Luca Ravazzolo, global underwriting officer, financial lines, commercial insurance, Zurich Insurance Group