Here we examine two areas where the D&O risk landscape is evolving and what that could mean for clients.
D&O and the change in status of a company
A number of corporate transactions or milestone events can have a material impact on D&O coverage. All D&O policies contain transaction clauses, which, if triggered, will send a policy into run-off until expiry (only paying claims for wrongful acts that occurred prior to the transaction date).
The triggers within these clauses can vary wildly. The more traditional tests are based on company disposal (if the policyholder is acquired or sells the majority of its assets to another party), but recent and more onerous transaction clauses have included insolvency events – meaning D&O cover is arguably more important than ever.
Extended reporting periods are often available. They can be contractually written into the policy, offering one, three or six-year run-off cover for a set additional premium. However, during recent hard market conditions, they have been more commonly removed and left to underwriter discretion.
Similarly, not all D&O policies will automatically cover new subsidiaries should the policyholder purchase another company. Most wordings have a new subsidiary threshold – if exceeded, the insured must inform the underwriter and may face charges for any additional exposure.
For this reason, it is vital to check transaction clauses, extended reporting period agreements and new subsidiary thresholds carefully, especially for companies with solvency concerns or those planning to be acquisitive.
Our advice to our clients is simple: please keep your broker updated on any corporate developments as you would other key stakeholders. Allow Gallagher to offer coverage advice and help you decide on the best course of action regarding what information does or does not need notifying to your insurer(s).
ESG and the impact on D&O
Environmental, social and governance (ESG) exposures have never been higher on the risk agenda for D&O insurers.
While good governance has always been at the epicentre of traditional D&O perils, the emergence of environmental and social considerations has underwriters shifting away from the more commonly reviewed financial health of a company and instead performing deep dives into the culture and tone set by a company and its boardroom.
Greenwashing is of great concern. The Financial Conduct Authority has already announced its intention to clamp down on companies that make statements and promises while setting targets on schemes such as decarbonisation which prove unrealistic or allegedly false.1 Furthermore, many of these companies cherry-pick the application of ESG factors without using a standardised framework. Without clear guidance and legal, as well as regulatory, framework from central governments there will be difficulty in achieving “green” standards.
We have seen a prevalence of investigations into how companies have chosen to publicise their efforts to tackle their carbon footprints, and the result can often be counter-productive. Policyholders are often left questioning – why go above and beyond the bare minimum if it lands us in trouble with the policymakers?
Social impact has also never been more forensically examined. Since the wholesale onset of social media, insurers have been increasingly concerned by social inflation. The public outrage that accompanies a corporate scandal or failure often beats a drum to the door of regulators who can no longer simply ignore the noise. It is not just those who are directly impacted that sign petitions calling for action, platforms such as Twitter give the masses a voice, and governmental bodies are baring their teeth accordingly.
All of the above can lead to D&O investigations, losses and claims. It is vital for clients to be ready to field difficult questions from underwriters and show how they are progressing towards a greener future while leaving a positive social impact.
Gallagher can help clients be ready with risk assessment and horizon scanning through AnotherDay, a consulting firm that works with our clients to understand the material ESG risks and provide practical recommendations to clients to reduce their exposure. Importantly, AnotherDay can identify relevant reputational and regulatory risks specific to current and emerging ESG trends and connect internal risk management with the risk transfer process.
This proprietary D&O risk management offering has allowed clients to benefit from a wider range of options from insurers at more competitive premiums. AnotherDay is able to effectively communicate and distinguish real risks related to the company, helping alleviate the underwriting information burden from clients and placing clients’ risks at the front of the queue for insurers.
Please get don’t hesitate to get in contact if you would like to discuss any of the points raised in this article further.