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D&O liability increasing as shareholder activism rises
Emerging perils include cyber and data privacy as well as reputational risks such as climate change impact.
Staff on December 1, 2016
New risks such as cyber incidents and data privacy, rising regulator and shareholder activism and the influence of third party litigation funders are putting corporate leaders under more pressure of falling foul of investigations, fines or prosecution over alleged wrongdoing, according to a new risk report by Allianz Global Corporate & Specialty (AGCS), a provider of Directors and Officers (D&O) insurance globally.
Directors and officers walk a managerial tightrope as executive liability increases. 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.
“While the legal landscape differs from country to country, increasing shareholder or regulatory action has become a global phenomenon that needs to be given top priority within companies’ internal risk management departments,” says Bernard Poncin, AGCS Global Head of Financial Lines.
According to AGCS analysis, non-compliance with laws and regulations is now the top cause of D&O claims, followed by negligence and maladministration/lack of controls. The average D&O claim globally for breach of duty costs over $1 million. However, in large corporate liability cases D&O claims can be valued in the hundreds of millions of dollars.
AGCS observes a general trend for D&O claims to be dismissed or resolved more slowly, meaning lengthier litigation, increased defense costs and higher settlement expectations. For example, an average U.S. securities class action case takes between three and six years to complete while legal defense costs average around $10 million, rising to $100 million for the largest cases.
The risk of being targeted in a securities class action remains a core concern for directors and officers in the U.S. If the pace of filings in the first half of the year continues, by year end 2016’s filings will represent the highest number of securities class actions since 2004. At current pace, M&A-related filings in federal courts will double the annual numbers observed in the last four years. The greatest percentage of class actions continues to be brought against companies in the biotechnology, pharmaceutical, and healthcare sectors.
The landscape for executives is further complicated by a number of emerging perils such as liability around cyber-attacks and data privacy. In the U.S. several class actions have already been filed related to data breaches. Data protection rules around the world are becoming increasingly tough with severe penalties for non-compliance. As a consequence, AGCS experts anticipate cyber security-related D&O litigation more widely in the U.S., but also in Europe, the Middle East and Australia – if there has been negligence in any failure to protect data or a lack of controls.
“Many directors used to see cyber as an IT issue and not an exposure for the board to consider,” explains Emy Donavan, AGCS Regional Head of Cyber Liability in North America. “But there is no escaping cyber risks and directors need to be adequately informed, otherwise they will leave themselves exposed.”
Other new management risks include negative disclosures or allegations around environmental pollution, climate change and modern slavery, which could result in reputational risks and shareholder activism, public outcry or governmental action.
Mergers and acquisitions (M&A) continue to be a key driver of D&O litigation and is predicted to continue at a rapid pace in the future. “M&A, but also divestitures, belong to the riskier moments in the life of a company,” says Poncin. “Expectations are always high, and synergies are easier planned than realized.”
In order to tackle the increase in executive risk, directors need to develop a highly sophisticated risk management culture. Examples include 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.
Executives should ask tough questions about compliance topics such as sanctions, embargoes, domicile registrations, price-fixing and fraud as well as “classic” D&O exposures such as M&A, capital measures and IPOs. D&O Insurance Insights: Management Liability Today contains best practice advice and checklists outlining how executives can mitigate these risks.
D&O liability increasing as shareholder activism rises
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