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Failure to comply with laws and regulations is the leading cause of D&O insurance claims for directors and officers, according to a recent D&O Insights report by Allianz Global Corporate & Specialty titled “Management Liability Today: What Executives Need to Know.”

D&O InsuranceNegligence and lack of controls are a close second as a cause of action for D&O claims, according to the report. Cases are also taking longer to resolve, usually between three to six years for securities class action cases. The longer the litigation, the higher the defense costs.

Advances in litigation funding, which make more money available to finance commercial litigation, are also a factor behind the increase in D&O insurance claims, notes Allianz.

Trends in D&O Risks

The Allianz report identifies a number of growing risks for companies, executives and investors in the arena of D&O insurance claims, as outlined below.

Securities class actions cases are increasing, climbing to a potential 12-year high in 2016. Increased M&A activity is one factor behind the increase in claims.

In a potentially restraining move, the Delaware Chancery Court earlier this year issued a ruling in the matter In re Trulia Inc. Shareholder Litigation, 129 A.3d 887 (Del. Ch. 2016) that limits “disclosure only” settlements in securities class action cases to a limited set of circumstances. As a result, the volume of these filings is declining.

The cost to defend the average securities class action case is $10 million, according to Allianz, with larger cases costing up to $100 million in legal defense costs.

Increased regulatory requirements are making many D&O claims more complex. Examples include automotive emissions test problems and the Panama Papers data leak. Many of these claims span multiple state or national jurisdictions, triggering both regulatory investigations and lengthy civil litigation.

Supply chain management issues may generate claims of wrongdoing brought by environmentalists, shareholder activists, or government agencies.

Data protection and cyber security are closely related, growing risks. As jurisdictions impose increasingly stringent privacy and data management regulations, it becomes more difficult for corporate directors and officers to maintain compliance. Even a small hacking attempt, if successful, can lead to significant expense in regard to reputational harm, legal defense, and associated recovery costs.

Directors & Officers May be Subject to More Personal Accountability

Individual directors and officers face an increased risk of prosecution for alleged corporate misdeeds or decisions, according to Allianz. When allegations of misconduct against an officer or director are made, the individual is potentially subject to regulatory investigations, criminal prosecution, or civil litigation.

D&O Coverage

D&O insurance policies typically consist of up to three major components, as outlined below.

  • Side A protects directors and officers against personal loss, including the cost of legal defense, in the event of claims made against them. Side A applies when the corporation does not provide D&O indemnification.
  • Side B covers corporate losses when directors and officers are indemnified, but does not apply to the corporation’s liability risk.
  • Side C provides entity coverage for the corporation’s own risk in the event of a D&O-related claim.

Click on the link to read the Allianz D&O Insurance Insights report.

Bill Hager’s Expertise as to D&O Insurance Policies and Their Agents.

Mr. Hager has extensive and substantive experience relating directly to D&O insurance policies (which are sold by property casualty insurance companies and by licensed property casualty insurance agents) including interpreting policy language and determining the insurer’s obligations under such policies.

As a regulator for eight years in five positions: ((i) Assistant Attorney General assigned to the Department of Insurance, (ii) First Deputy Commissioner of Insurance, (iii) Iowa Commissioner of Insurance, (iv) Administrative Law Judge, and (v) Executive and Member of the National Association of Insurance Commissioners); Mr. Hager, along with his staff, approved (or disapproved) of the language of D&O insurance policies used by each of the 1,000 property casualty insurance companies doing business in the state, selling among other coverages, D&O policies. This regulatory action also included the approval of most all policy application forms and policy forms themselves in use today. In addition, I regularly served as an Administrative Law Judge in matters relating directly to D&O insurance policies.

While Iowa Insurance Commissioner, Mr. Hager also served as a member of the National Association of Insurance Commissioners (“NAIC”), (including membership on its Executive Committee), the nationwide organization of all state insurance commissioners. That organization has responsibilities for establishing model insurance administrative regulations and model statutes for consideration by all of the states.

Click on the link to read more about Mr. Hager’s experience as a D&O insurance expert.

Disclaimer

Material for this article was taken from a collection of industry sources relating to the subject.

In all of the general statements here, see the state law of the controlling jurisdiction. Every case is different and circumstances vary widely depending on the governing state law, policy provisions, and related considerations.

This blog is provided for educational purposes only. It is not intended to provide legal advice or an opinion in regard to any topic discussed. The blog should not be used as a substitute for legal advice from a licensed attorney in your state.