A hardening market for Directors & Officers insurance

Insured are now having to deal with increasing exposure and the tightening of policies by insurers, with certain industries becoming more prone to D&O action. Insurers are now offering policies with more restrictive terms and widened exclusions. This trend is expected to continue, but some light at the end of the tunnel is that underwriting experts predict premiums will start to stabilise over the next 12 months.

Factors which have been driving a hard market are:

• Covid-19 claims
• Cyber threats and the increased regulatory burden re: managing cyber risks
• Economic, Social and Governance (“ESG”) and the real threat of climate change
• Fear of class actions/group litigation (US and Australia are leading the way here however, the UK could quickly see this start to materialise domestically)

Covid-19

The economic impact of Covid-19 has left many insureds querying their D&O coverage. Those companies that have been identified as being underprepared for the impact of the pandemic are most at risk of litigation. This will be of particular importance to those listed companies where litigants are alleging a failure to disclose the true picture of its position to the market, in violation of the Listing Rules. This is an area where we might see securities class actions becoming popular.

Cyber Risk

Cyberattacks are becoming a lot more common and much more sophisticated often resulting in thousands of pounds being paid in ransom. The actions of the directors are then scrutinised, and allegations made to the effect that the directors did not act in the best interests of the company/any investors by a failure to implement appropriate systems and controls to prevent a cyber-attack.

ESG

Climate change and factors affecting the environment must now be a main priority for directors to provide the appropriate guidance to investors and shareholders. A company’s strategy on how to deal with climate change issues and any risks faced by the company because of climate change must be correctly disclosed. In October 2021, the PRA laid out guiding principles regarding future reform for climate-related financial risk and how a proactive approach is needed to ensure companies are capable of resilience against the effects on climate change. With regulatory interest, there is no doubt that directors will be under more scrutiny to avoid regulatory action and litigation.

Other social issues for directors to consider now also are the ethical and culture risks from increasing use of social media, and derivative class actions regarding inappropriate workplace relationships.

On the governance front, we’re looking at issues relating to boardroom and management diversity, and executive salaries. NASDAQ now requires listed companies to explain if there is no diversity and the Financial Conduct Authority is also investigating this for listed companies.

Our dedicated insurance team can assist with any insurance defence or coverage queries in this area, or point you in the direction of brokers. Please get in touch with any queries.