The evolving landscape of global trade has forced corporate leaders to reconsider their exposure to protectionist measures, particularly tariffs. As these developments gather pace, directors and officers are encountering new challenges in managing both operational and liability risks.
John M. Orr, D&O liability product leader, FINEX NA at WTW, discussed how tariffs are reshaping the corporate risk environment and altering the considerations for D&O insurance coverage.
Orr pointed to supply chain disruptions as one of the immediate consequences of tariff imposition. He said that companies heavily dependent on suppliers in countries targeted by tariffs may face significant operational setbacks.
"Tariffs have the potential to disrupt global supply chains," he said. Organisations may experience “delays, quality issues, shortages and rising costs” as they struggle to adjust to the new trade dynamics.
The economic effects of tariffs extend beyond logistics. Orr noted that by imposing additional taxes on imported goods, tariffs lead to higher costs for raw materials, components, and finished products. Often, businesses try to pass these costs to consumers.
“For businesses that cannot pass on increased costs to consumers, profit margins can be squeezed. Companies in industries with historically thin margins, such as consumer electronics, transportation and logistics, might be particularly vulnerable,” he said.
Companies must also manage heightened regulatory compliance requirements, which bring about additional costs and the threat of fines for non-compliance.
“Tariffs often come with potential regulatory changes, including documentation requirements, customs duties and import/export regulation. Compliance can increase administrative costs. Non-compliance can result in fines and penalties,” Orr said.
In terms of liability exposures for directors and officers, Orr outlined how tariff-related business disruptions could lead to increased legal risks. He emphasised that a significant downturn in a company’s financial performance, driven by tariff impacts, could spark shareholder litigation.
“Should tariffs impact public company financial results that result in a precipitous drop in stock value, securities class actions against the company and its directors and officers are foreseeable,” he said.
“Allegations would typically centre around a purported failure adequately to disclose these risks in public filings, rendering them false or misleading and subject to liability under the federal securities laws. Allegations of fraud can also arise relative to private company investor disclosures,” Orr said.
Further compounding the risk are shareholder derivative lawsuits, which can emerge when boards are alleged to have breached fiduciary duties. Orr explained that if companies are perceived to have failed in anticipating or mitigating tariff-related risks, they could face increased derivative litigation, as well as pre-suit derivative demands and statutory books and records demands.
"The result may be an increased risk of derivative litigation, pre-suit derivative demands, and statutory books and records demands, and statutory books and records demands. This impacts public companies and, to a lesser degree, private companies,” Orr said.
Regulatory scrutiny is another concern. Orr noted that investigations may follow if authorities such as the Securities and Exchange Commission (SEC) or US Customs and Border Protection believe companies have misrepresented the financial impacts of tariffs or engaged in improper customs classifications.
“Consumer lawsuits may arise if a company is perceived to have used tariffs as a pretext for price increases (price gouging, for example), misrepresented tariff impacts in marketing, or passed on costs in allegedly deceptive or unfair ways,” he said.
Broaching the topic of coverage, Orr explained how D&O policies are structured to respond to these emerging risks.
“D&O policies are, by design, written expansively to cover ‘loss’ arising from ‘claims’ against ‘insureds,’ including directors and officers,” he said. “As to alleged conduct in their official roles, therefore, individuals are broadly covered — subject, as always, to policy limitations and exclusions, including the exclusion for finally adjudicated deliberate misconduct.”
Coverage nuances vary between public and private companies. Orr noted that while public companies typically have D&O coverage limited to securities claims, private companies often benefit from broader entity coverage that addresses some non-securities exposures.
“Consumer actions, however, presumably without securities-related allegations, would not be considered securities claims. Many D&O policies provide response costs coverage for pre-suit derivative demands and related books and records demands, subject to sublimits of liability,” he said.
The issue of regulatory investigations adds another layer of complexity. Orr pointed out that while D&O policies often include coverage for individual directors targeted by investigations, it is not customary for these policies to cover investigations directed at the entity itself.
“For public companies, conditional coverage for this exposure may be available on a case-by-case basis, often for additional premium. If coverage for the exposure is afforded to private companies, it is most commonly subject to smaller sublimits of liability,” Orr said.
When it comes to enforcement actions, the scope of coverage again differs. Orr said that public companies are more likely to have coverage for proceedings classified as securities claims, especially if individual insureds are also named.
“Proceedings brought by the SEC alleging violations of securities laws may have limited coverage, while proceedings brought by the Federal Trade Commission (FTC) or other non-securities regulatory authorities might not be covered. Private company policies do not typically restrict this coverage, considering regulatory proceedings to be ‘claims,” Orr said.
Orr also emphasised the importance of D&O coverage in distressed situations, particularly bankruptcy.
"Bankruptcy-focused D&O coverage specialisation is essential in times of uncertainty," he said. “Companies with any inkling of upcoming issues should contact specialized D&O brokerage distressed risk teams sooner than later (but it’s never too late).”
Looking ahead, Orr indicated that D&O underwriters are increasingly attuned to tariff-related risks, though scrutiny is not yet uniform. He observed that companies with significant exposure to global trade risks may begin to encounter more rigorous underwriting protocols.
“Companies with more direct exposure to tariff-related risks may begin to experience D&O underwriting protocols that include questions focused on trade risk and practices, such as supply chain dependencies,” he said.
“Whether more scrutinizing underwriting practices arise may depend on whether the administration’s protectionist policies are short-lived or become protracted,” Orr said.
What are your thoughts on this story? Please feel free to share your comments below.
