Directors and officers are facing a flood of new and heightened risks thanks to the highly volatile business environment created by the COVID-19 pandemic, according to a new report from Allianz Global Corporate & Specialty (AGCS).
Among the key risks for which company directors and officers could be held liable are risking insolvency exposure, growing cybersecurity risks and persistent securities class-action activity, AGCS said. Next year, companies also need to guard against “event-driven litigation,” which can be triggered by things such as inaction on diversity, poor sustainability performance, or underestimating or misrepresenting COVID-19 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,” AGCS said. “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.”
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“Many insurers are still digesting the effect of previous pricing inadequacy and loss trend increases from prior-year policies,” said 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. As a global D&O insurer, AGCS remains committed to working in partnership with our customers to ensure we have sustainable solutions for all parties involved.”
Among the top concerns for the D&O insurance sector are forthcoming insolvency warnings, AGCS said. According to credit insurance company Euler Hermes, most insolvencies are still to come through the first half of 2021. Euler Hermes’ global insolvency index is likely to hit a record high for bankruptcies, up 35% by the end of next year, with top increases predicted in the US, Brazil, China, and European countries including the 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,” said David Van den Berghe, global head of financial institutions for AGCS.
The cybersecurity threat landscape is also constantly evolving, with ransomware attacks and data breaches on the rise. The COVID-19-related shift to remote work has also increased security vulnerabilities, AGCS said.
Class actions and COVID-19 cases
Class-action activity – particularly in the US – remains a key risk, although during the first half of 2020 new US securities class-action filings were at a pace about 18% below rates seen in 2019. That was largely due to the disruption of business and court activity resulting from the pandemic, AGCS said.
However, the frequency of court filings is on track to match rates in 2017 and 2018, and will be far higher than every year prior to those. The percentage of new filings in 2020 targeting foreign-domiciled, US-listed companies has been nearly double the average in recent years. Around half of these have targeted Asia-domiciled companies. Outside the US, securities class actions are being filed in record numbers, and the threat of facing a class-action lawsuit has increased in many jurisdictions, according to AGCS.
This year has also seen the first class-action lawsuits directly related to COVID-19. Examples include lawsuits against cruise lines that suffered coronavirus outbreaks, as well as suits regarding the business impact of COVID-19 on companies’ financial performance or operations and misrepresentations about COVID-19-related therapies.
“Another threat looming on the horizon comes from the return-to-office steps taken by businesses,” Williams said. “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.”
ESG and private company issues
“Soft” management topics like diversity, climate change or ESG concerns are increasingly triggering event-driven litigation, according to AGCS. For example, Facebook, Oracle and Qualcom have all been subjected to diversity derivative lawsuits. In such cases, shareholders usually allege that directors violated their fiduciary duties by failing to take action on diversity issues.
Companies around the word are also facing increasing public scrutiny regarding their ESG performance, according to AGCS.
“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,” said Joana Moniz, global head of commercial financial lines at AGCS.
Climate-change-driven litigation and activism has also been on the rise in recent years, with cases targeting major carbon-emitting industries filed in more than 30 countries.
While publicly listed companies are generally more exposed to D&O risks, private companies are also at risk. The COVID-19 pandemic is currently exposing private companies and their executives to greater litigation risk, AGCS said.
“Generally, D&Os of privately held companies are more closely involved in all of the company’s operational topics and business decisions,” Moniz said. “This can more easily translate into being held personally liable through different forms of litigation.”