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Growing trend toward seeking punitive, personal legal action against corporate leaders: AGCS


November 28, 2016   by Canadian Underwriter


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New and emerging risks are putting corporate leaders under more pressure of falling foul of investigations, fines or prosecution over alleged wrongdoing, notes a new global report issued Monday by Allianz Global Corporate & Specialty (AGCS).

“There is a growing trend toward seeking punitive and personal legal action against executives for failure to follow regulations and standards, which could result in costly investigations, criminal prosecutions or civil litigation,” concludes D&O Insurance Insights: Management Liability Today.

Businessman placing wooden block on a tower. Risk and strategy in business conceptAmong others, the report cites contributing risks such as cyber incidents and data privacy, rising regulator and shareholder activism, and the influence of third-party litigation funders, notes a statement from AGCS, Allianz Group’s dedicated carrier for corporate and specialty insurance business.

“Third party litigation funders are changing the global litigation map, with their influence pivotal in the development of collective actions against financial institutions and commercial entities and their directors and officers,” states the report’s summary. “Litigation funders are front and center in some of the largest multi-jurisdictional claims. Activity is expected to increase,” the summary points out.

Bernard Poncin, global head of financial lines for AGCS, acknowledges the legal landscape differs from country to country. Still, “increasing shareholder or regulatory action has become a global phenomenon that needs to be given top priority within companies’ internal risk management departments,” Poncin emphasizes.

Among others, the report identifies as some main findings the following:

  • mergers and acquisitions activity remains key driver of D&O claims;
  • emerging perils include not only cyber and data privacy, but also reputational risks and shareholder activism, public outcry or governmental action associated with negative disclosures or allegations around environmental pollution, climate change and modern slavery; and
  • the top cause of D&O loss by number and value is non-compliance with laws and regulations, with the average claim for breach of trust and care globally amounting to more than US$1 million.

Based on AGCS’s analysis of 576 claims between 2011 and 2016, “negligence, maladministration/lack of controls, breach of trust/fiduciary duty and inadequate/inaccurate disclosure are the other top causes of D&O loss by number of claims received,” the summary notes.

D&O Claims by number and valueInternally, claims arise internally from trustees, subsidiaries, the company itself and whistleblowers; externally, creditors, shareholders, customers, suppliers, competitors, tax authorities, government regulators or even former employees bring the most claims, the report adds.

While the average D&O claim globally for breach of duty was more than $1 million, “in large corporate liability cases, D&O claims can be valued in the hundreds of millions of dollars,” notes the AGCS statement.

These high costs seem linked to the time taken to resolve claims. “AGCS observes a general trend for D&O claims to be dismissed or resolved more slowly, meaning lengthier litigation, increased defence costs and higher settlement expectations among plaintiffs, particularly in the United Kingdom, Canada, Australia, France, Spain, Hong Kong and the U.S,” the report summary states.

“According to AGCS, the average securities class action case in the U.S. can take between three and six years to complete, while legal defence costs average around $10 million, rising to $100 million for the largest cases,” the statement notes.

For directors and officers south of the border, the risk of being targeted in a securities class action remains a core concern, with the greatest percentage of actions being brought against companies in biotechnology, pharmaceutical and healthcare.

If the current pace of class action filings continues, 2016 “will represent the highest number of securities class actions since 2004,” AGCS points out.

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“In Canada, directors of private and public companies face exposure to claims for environmental clean-up costs,” the summary notes. “Directors of private and public companies face exposure to claims by government agencies for environmental clean-up costs, especially after the insolvency of the entity,” the report states.

“Especially troubling is that the liability can attach even if the directors were not involved in decisions that led to the contamination. Meanwhile, low commodity prices are causing difficulties for many resource companies, with an uptick in insolvencies and company restructuring,” the report adds.

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Overall for Canada specifically, the report states “regulatory aggression continues to feature heavily in the landscape for directors. The Ontario Securities Commission (OSC) is becoming more demanding in its investigations, as is the Alberta Securities Commission.”

It further points out that whistleblower protections related to non-compliance with securities legislation are being ramped up. “A whistleblower may receive a cash pay-out of 5% to 15% of the total penalties imposed in a case.”

Top causes of D&O loss by value of claimsAGCS points out that with globalization, executive liability exposures are becoming more complex and interconnected, and claims may involve regulatory investigations and civil litigation in multiple jurisdictions.

“International companies are being sued in the U.S.,” Paul Schiavone, AGCS’s regional head of financial lines in North America, says in the statement. However, “claims and litigation growth outside the U.S. has also been significant and is helping drive demand for global D&O insurance programs,” Schiavone notes.

“Emissions testing problems in the automotive industry are an example of a potentially systemic commercial D&O loss,” the summary reports.

“The Panama Papers leaks illustrate how a data breach can impact professional service providers and financial institutions, which could in turn spark multiple claims across several jurisdictions,” it adds.

Further complicating overall risk matters are emerging perils such as liability around cyber attacks and data privacy. Data protection rules around the world are becoming increasingly tough with severe penalties for non-compliance, AGCS reports.

In cases where there has been negligence in any failure to protect data or a lack of controls, AGCS anticipates “cyber security-related D&O litigation more widely in the U.S., but also in Europe, the Middle East and Australia,” the company statement adds.

“In future, it may be possible to claim substantial damages from directors if there has been negligence in any failure to protect data or a lack of controls,” the report summary notes.

“There is currently uncertainty around the issue of directors’ cyber liabilities, but it is likely that someone will make a successful argument that a director was negligent or had not paid sufficient attention to cyber security in future,” it suggests.

“Directors’ cyber exposures are likely to grow further with increasing reliance on technology,” the summary predicts.

“There is no escaping cyber risks and directors need to be adequately informed, otherwise they will leave themselves exposed,” Emy Donavan, AGCS’s regional head of cyber liability in North America, argues in the company statement.

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AGCS’s recommendation to combat the risk is for “directors need to develop a highly sophisticated risk management culture.”

This may include, among other things, instilling first-class cyber and IT protection, keeping records of all information relevant to a managerial role, and maintaining open communication with authorities, investors and employees.

Limits of insurance coverage purchased can range from US$1 million for small and medium-sized companies to more than US$500 million for global Fortune 100 giants.

“There is increasing demand for SME D&O cover, though penetration is still low due to lack of awareness and education,” the report notes.

It suggests that six steps to structuring an insurance program are as follows:

  • benefit from the degressive nature of insurance pricing and prefer higher limits over lower limits;
  • consider special and dedicated protection for the natural insured persons that cannot be eroded by entity coverage elements and still works in case the entity can no longer indemnify;
  • diversify the program;
  • ensure there is an international insurance program in place in case subsidiaries operate in strictly non-admitted territories;
  • confirm the claims department of the lead carrier has already successfully settled large claims; and
  • do not overload policies with too many (exotic) “extras,” leaving the limit available for the main risks.