Canadian Underwriter

Why the D&O market will probably get harder

December 15, 2020   by Greg Meckbach

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Data breaches and the impact of COVID-19 on a company’s financial performance are among the “megatrends” affecting directors’ and officers’ liability claims, Allianz Global Corporate & Specialty warned in a report released Dec. 15.

“Outside the U.S., securities class actions are being filed in record numbers and the threat of facing an action has increased in many jurisdictions – notably in Australia and Canada,” AGCS said in the report titled Directors and Officers (D&O) Insurance Insights 2021.

Securities class action activity and COVID-19 impact is one of the five megatrends identified by AGCS.

The Munich-based commercial insurer is alluding to lawsuits in which companies and their boards are sued by shareholders after a significant drop in stock price.

AGCS says the other four mega trends are:

  • Global economic developments and insolvency exposure;
  • The D&O exposures of privately-held companies;
  • The impact of diversity, climate change, and environmental and social governance (ESG) factors; and
  • Cyber attacks.

“Often the aftermath of data breaches has been devastating to the companies affected, including fines, costly breach notification procedures, business interruption, and intensely negative publicity,” AGCS said in the report.

Consequently, directors and officers are at risk of being sued over alleged failures to put in place appropriate corporate governance to protect their firms against cyber risk.

COVID-19 was declared a pandemic Mar. 11 by the World Health Organization. Published reports indicate Ontario is starting to vaccinate health care workers now but the vaccines will not be available to the general population until closer to April 2021.

The economic impact of COVID-19 is leading to insolvency risk, AGCS said in its report.

“Insolvency is a key cause of D&O claims, as insolvency practitioners look to recoup losses from directors. There are many ways that stakeholders could go after directors following insolvency, such as alleging that boards failed to prepare adequately for a pandemic or for prolonged periods of reduced income.”

Publicly-traded companies aren’t the only ones at risk. In private companies, the majority of lawsuits against directors and officers are related to employment matters.

That said, directors and officers of privately-held firms can also be sued for breach of fiduciary duty – for example, when a plaintiff alleged the company was sold for an inadequate price.

“Generally, D&Os of privately-held companies are more closely involved in all of the company’s operational topics and business decisions, which may more easily translate into the direct, personal impact of different types of litigation impacting them.”

The megatrend of diversity, climate change, and environmental social and governance (ESG) factors is likely to cause a variety of civil suits in the future, AGCS warned.

Some American technology firms have been sued by shareholders alleging that the company’s board of directors violated their fiduciary duties by their inaction on diversity issues. In some instances, it is alleged by plaintiffs suing corporations that those corporations’ boards lack Black directors, AGCS said in the report.

In other cases, plaintiffs allege that companies have failed to adjust business practices in line with changing climate conditions.

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