Given that the global D&O insurance market is valued at over $20B today1, it’s remarkable to consider that there was a time when this coverage didn’t exist—a time when there were few regulations surrounding the sale of securities, and little to no accountability placed on directors and officers for the actions of a business or its impact on corporate profitability and share price.
In contrast, directors and officers today need to navigate a complex minefield of statutory and regulatory responsibilities related to their fiduciary duties of care, loyalty and obedience. They need to balance shareholder expectations of profitability with increased public demands for social responsibility. And increasingly, it’s no longer enough for companies just to do the right thing: they must show how ethical behavior is ingrained in their corporate culture.
As regulations and societal expectations continue to evolve, D&O insurance is adapting, and brokers must understand these changes to best protect their clients.
D&O and Corporate Conscience
To understand where the D&O market is headed, it’s helpful to look back briefly at how we got where we are today.
Congress passed the first antitrust law, the Sherman Act, in 1890, and followed up in 1914 with two additional measures: the Federal Trade Commission Act (which created the FTC) and the Clayton Act. These laws—still in effect today—not only prohibited some anticompetitive mergers but began to set the standard for what constituted unlawful business practices. Many state statues followed suit in the years ahead.
However, it took until the stock market crash of 1929 to give rise to the development of D&O insurance with the first policies (most likely) written in the 1930s by Lloyd's. These policies were the result of lawsuits around company failures which led to directors and officers paying judgments and settlements. The insurance industry saw an opportunity to create a product to protect them.
In the late 1960s, the Escott v. Barchris Const. Corp decision illustrating the personal liability faced by directors and officers generated significant interest in the coverage. Subsequently, the D&O insurance product underwent various changes until it arrived at its current Side A/B/C format.
More recently, the focus of D&O liability has largely been on governance, driven by the Enron scandal of 2001 and regulations and litigation stemming from the Great Recession of 2008. Additionally, new risks continue to arise that could never have been envisioned when coverage was first developed. For example, directors and officers are increasingly facing lawsuits related to cyber-attacks, alleging failure to implement adequate controls or disclose cyber risks to investors.
D&O underwriting has evolved as well. It’s no longer simply adequate for an organization to “check the box” when it comes to having appropriate accounting and securities controls in place. Underwriters want to ensure that a company’s words and deeds are a true reflection of its culture. Buyers should therefore expect lengthy discussions between underwriters and their management team and/or board.
Social Trends and D&O Evolution
Throughout the evolution of D&O insurance, the concept of a "corporate conscience" has been constant. In recent years, investors began evaluating—and board rooms began focusing on—things such as corporate responsibility, sustainability and impact investing. Today, the emphasis of investors is increasingly on two key social trends: ESG (Environmental, Social, and Governance) and DE&I (Diversity, Equity, and Inclusion).
Until recently, the term ESG was a non-factor for investors. Now, investors are increasingly demanding ESG information, with the ‘Environmental’ component garnering the most attention. Pollution has long been a risk companies have managed, but the meaning of Environmental in ESG encompasses much more than direct contamination, considering the far-reaching environmental impact (negative or positive) a company has, with that impact presumably reflected in its share value.
On a related note, climate change litigation is an increasingly lucrative avenue for plaintiffs’ attorneys. Companies (and their directors) are being sued for direct or indirect contributions to climate change, including allegations of failing to disclose or mitigate risks. On the other hand, suits have also been filed for making allegedly misleading environmental responsibility claims in order to bolster a company’s public image and share price, a practice often known as “greenwashing.”2
In seeking D&O coverage for ESG risks, buyers may contend with strengthened pollution exclusions and specific climate change exclusions. Certain sectors of business may also be facing greater scrutiny by underwriters, with coal, petrochemical and similar “socially undesirable” classes having a much more difficult time securing D&O coverage. On the other hand, buyers that have strong ESG programs in place will generally obtain much more favorable terms and pricing.
Issues around DE&I have seen increased litigation as well. Several shareholder actions regarding diversity issues have been brought against the boards of public companies across several industry sectors in recent years.3
Suits claim violation of fiduciary duty through failure to address diversity among officers and/or board members, making misleading statements of companies’ commitments to diversity, and even allegations of violations of the Securities Exchange Act that led to shareholders’ making investments as a result of diversity claims. These actions are demanding not only monetary damages, but remedies such as diversity training, initiatives for hiring diverse employees, resignation of board members, and, of course, attorney fees.
Even if lawsuits are not filed, directors and officers know they are under the microscope when it comes to issues of diversity—not just from investors, but also from regulators, lawmakers and the public at large. Although no D&O policy exclusions around this issue are likely to be seen, buyers can expect underwriting inquiry into their DE&I policies and practices and the expectation that diversity is not just a buzzword, but a commitment reflected in a company’s culture.
D&O Market Remains Volatile
The history of D&O insurance demonstrates that this is a market in a constant state of evolution, impacted not just by changes in laws and regulations, but also by evolving societal expectations around fiduciary duty and corporate conscience.
For businesses, managing D&O risks requires good governance, strong frameworks around emerging issues such as ESG and DE&I, as well as a program of liability protection from an insurer with the capacity and appetite to offer the broadest coverage available. For retail agents and brokers, it is important to partner with an expert who has the knowledge and market access to navigate this complex landscape, as well as the proven ability to offer programs and solutions that address changing risk.
Amwins Private D&O Endorsement Helps Manage ESG Risk
Amwins can be that partner. As an innovative leader in the E&S insurance industry, we've united with top rated carriers to develop an exclusive, first of its kind Private D&O endorsement that provides coverage for ESG exposures.
Designed to help companies respond to this new and evolving risk, whether they have an ESG plan or not, the endorsement addresses common risks such as allegations of failing to disclose or mitigate risks related to indirect contribution to climate change and failure to address diversity among officers and/or board members.
With broad coverage and trigger definitions, the endorsement is complementary when binding a policy from a participating carrier. Contact your Amwins broker today to learn more.
2 New York City filed a lawsuit in 2021 against three oil and gas companies alleging the companies advertised themselves as leaders in fighting climate change, but instead misled consumers through the promotion of "cleaner" and "emissions-reducing" fuels without disclosing their climate impacts. Earlier this year, a Canadian coffee producer was ordered to pay a $3 million fine after it made false claims about the recyclability of its packaging, while last year the UK Advertising Standards Authority ruled that Ryanair’s low-emissions advertising campaign had misled consumers.
3 i.e., Facebook, Oracle, Gap and Cisco