COVID-19 related insolvencies and ’event-driven’ litigation linked to diversity, climate change and/or ESG concerns are exposing D&Os
The COVID-19 pandemic has created a highly volatile and uncertain environment for businesses resulting in a litany of new or heightened risks for directors and officers (D&O) as well as exacerbating the situation in an already strained D&O insurance market, according to a report from Allianz Global Corporate & Specialty (AGCS).
Rising insolvency exposures, growing cyber security threats and persistent securities class action activity are among the key risks for which D&Os of companies could be held liable.
In 2021, companies also need to be on guard against “event-driven litigation” which can be caused by different triggers such as inaction on diversity, poor sustainability performance or for underestimating or misrepresenting Covid-19 related risks.
Growth in the number of lawsuits as well as rising claims frequency and severity has already resulted in a difficult environment for the D&O insurance sector in recent years. Underwriting results have been negative in many markets around the world, including Australia, the UK, the US and parts of Europe. While the market was correcting itself at the beginning of 2020, it was then hit by the current pandemic and economic crisis.
“Many insurers are still digesting the effect of previous pricing inadequacy and exposure and loss trend increases from prior-year policies,” says Shanil Williams, global head of Financial Lines at AGCS. “This is also at a time of great uncertainty around forward-looking exposure assessments, in particular the impact of Covid-19 on the economy in general and on specific industries.”
”Combined with many ‘known unknowns’ like climate change, cyber risks or environmental, social or governance (ESG) factors, this has created a lot of nervousness in this sector.”
Forthcoming insolvency warnings are among the top concerns for the D&O insurance sector as insolvency is a key cause of D&O claims – insolvency administrators usually look to recoup losses from directors.
According to Euler Hermes, the bulk of insolvencies is still to come through the first half of 2021, with its global insolvency index likely to hit a record high for bankruptcies, up 35% by end of 2021, and with top increases expected in the US, Brazil, China and core European countries such as 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,” says David Van den Berghe, global head of Financial Institutions at AGCS.
Companies also face a constantly evolving landscape of cyber security threats as ransomware attacks and data breaches continue to be on the rise, while the shift to remote working due to Covid-19 has generally increased security vulnerabilities. Investors view cyber risk management and adequate security standards as a critical component of a board’s oversight responsibilities.
Class actions and Covid-19 cases
Collective redress activity particularly in the US remains a key risk for any board of management although new US securities class actions filings were pacing about 18% behind rates seen in 2019 during the 1H of 2020 according to Cornerstone Research. This is largely due to the disruption of business and court activity caused by the pandemic.
Nonetheless the frequency of court filings is on track to match rates in 2017 and 2018 and will be well in excess of every year prior to those. The percentage of new filings in 2020 targeting foreign-domiciled US-listed companies has been nearly twice the average in recent years, with around half of these against Asia-domiciled companies including in China and Singapore.
Outside the US, securities class actions are being filed in record numbers and the threat of facing an action has increased in many jurisdictions. The landscape for collective redress in Europe has evolved over the last few years and collective action is a growing exposure.
Shareholders have filed the first class action lawsuits directly related to Covid-19. Examples include suits against cruise ship lines that suffered Covid-19 outbreaks, as well as litigation regarding the business impact of the pandemic on companies’ financial performance or operations or misrepresentations about coronavirus-related therapies.
“Another threat looming on the horizon comes from the return to office steps taken by businesses. Such decisions are fraught with peril, with regard to shareholder derivative actions, but also in relation to other forms of litigation stemming from employees or customers,” warns Williams.
ESG and private company issues
Beyond financial performance and shareholder value it is increasingly ‘soft’ management topics that trigger so called “event-driven litigation” against boards: diversity, climate change or ESG concerns are increasingly seen as opportunities to bring class actions or to force a settlement.
For example, Oracle, Facebook and Qualcomm are among the technology companies which have been subjected to diversity derivative lawsuits. In such cases shareholders typically allege that directors violated their fiduciary duties by their inaction on diversity issues such as remuneration or nomination of new black board directors.
Companies around the world find themselves under increasing public scrutiny regarding their ESG performance. “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,” explains Joana Moniz, global head of Commercial Financial Lines at AGCS.
In addition, climate-change-driven activism and litigation has been on the rise in recent years, too. Cases targeting major carbon-emitting industries have been filed in more than 30 countries, although most cases are filed in the US.
While publicly-listed companies are generally more highly exposed to D&O risks, the situation of private companies also is aggravating. The Covid-19 pandemic is currently placing private companies and their executives under considerably higher litigation risk.
“Generally, D&Os of privately-held companies are more closely involved in all of the company’s operational topics and business decisions. This can more easily translate into being held personally liable through different forms of litigation,” says Moniz.
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