D&O risks spread to unforeseen niches in post-pandemic economic and market landscape

Directors & officers (D&O) liability is encroaching on ever new ground, especially in post-pandemic market and economic conditions, meriting closer review from corporate leaders and liability underwriters, according to  Allianz Global Corporate & Specialty (AGCS)’ annual D&O report.

Post-pandemic insolvency risks, market volatility, liability around the use of SPACs for M&A, ESG investment needs and litigation trends are all reshaping the demands on coverage.

Insolvency risks, seemingly low if judged by survey or bankruptcy data, might actually be masked by government stimulus and be poised for break-out as policy is normalised, Allianz authors warned. Insolvency risks would be tipped towards developing nations less able to spread out their supportive measures, authors suspected.

“Insolvency exposures remain a key topic in the D&O space and underwriters are increasingly looking into forward looking key performance indicators and predictive modeling tools,” said Shanil Williams, global head of financial lines at AGCS, citing several headline cases in 2021.

Market conditions post-pandemic also raise concerns. Market volatility raises risks for financials, including asset bubbles and inflation, all just as pressure is ramping up for the financial sector to prove its mettle on ESG investments, authors claimed.

"More and more banks and insurers are expected to assign individual responsibility for overseeing financial risks arising from climate change, while investors are paying closer attention to the proper disclosure of the risk that it poses for the company or financial instrument they invest in, as demonstrated by a number of recent actions," authors noted. Greenwashing risks could land on investment and insurance leaders, they warned.

The 2020 surge in market usage of SPACs for M&A and back-door IPOs bear unappreciated threats, authors added, noting that any vehicle designed to grease deals and end-around regulations open directors to a host of liabilities around mismanagement, fraud, misrepresentation or disclosure violations.

On the litigation front, the New York courts appear to be allowing an uptick in derivative litigation against foreign firms, authors noted, and "the consequences to directors and officers forced to defend themselves in derivative litigation before US courts can be severe,” said David Ackerman, global claims key case management at AGCS.

“The actions and culture of organisations and their directors and officers are coming under heightened scrutiny from a wide range of stakeholders, with litigation risk a primary concern,” said Williams.

Derivative cases alleging a lack of management board oversight, although still facing a high bar for going to court, have been increasing in terms of settlement size, authors added. Board oversight concerns may spread most rapidly into corporate IT security measures against cyber offences, they noted.

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