Compared to general liability and property insurance, directors and officers (D&O) liability insurance might seem a bit complex. The very name can conjure up images of Wall Street intrigue and corporate malfeasance. And the number and variety of risks and possible claimants can be intimidating.
But there’s nothing complicated about the opportunities the current D&O marketplace offers agents and brokers, both in terms of generating new business and protecting their own organizations. “Agents and brokers are in the ideal position to assess potential gaps in an overall risk management program and advise on coverages that can help navigate today’s changing liability environment,” says Jason Wallace, Head of Management Liability at The Hartford.
Public vs. Private
Both public and private companies face risks that can leave them exposed to D&O liabilities.
Wallace explains, “The core purpose of D&O insurance is the same for public and private companies, protecting the personal assets of directors and officers from litigation stemming from their service in those roles.”
The D&O exposures, however, differ to a certain degree.
Public companies can face security suits from disgruntled shareholders, as well as actions around mergers and acquisitions. Claims can also arise from investors, customers and suppliers. For private enterprises, D&O coverage is more expansive as most policies extend coverage to the entity. Distinct sources of litigation can be family members (in the case of succession planning) and minority shareholders.
Relatively new exposures arising from issues like cyber security and the #Metoo movement can affect both public and private companies, as well as not-for-profit entities.
“The D&O exposure to things like #MeToo or cyber breaches depends a great deal on the corporate governance and culture of a company,” Wallace says.
For example, issues of governance come into play regarding when and how to report or engage with human resources in circumstances that involve alleged harassment. This could include having a documented process to fully investigate and respond to complaints of harassment. The D&O policy would exclude matters covered by employment practices liability insurance but respond to issues that involve governance.
A similar situation applies to cyber security. Board level response and attention to cyber threats, such as the level of funding directed toward company-wide information security and infrastructure, could involve D&O coverage.
Un cyber liability insurance policy would cover a first-party notification requirement, credit monitoring investigation and other expenses associated with a data security breach, like identity protection solutions, public relations and legal fees.
ESG: A Factor in D&O Underwriting
As businesses become more transparent around their environmental, social and governance (ESG) work, insurance carriers will also look at it during the underwriting process of D&O coverage.
Ziad Kubursi, head of financial, executive and transactional liability at The Hartford, explained that ESG is becoming a factor in D&O underwriting because a public or private business’ board of directors of officers can face lawsuits from shareholders or customers if the company doesn’t follow certain requirements or they believe the company made false claims.
Depending on a business’ ESG risks, operations and initiatives, they can be considered for a different D&O policy that includes more favorable pricing and other policy details.
For example, The Hartford participates in a program where businesses work with international law firms to review ESG frameworks.1 For businesses that are actively working on ESG priorities, The Hartford provides enhanced coverage for ESG-related exposures, according to Kubursi.
D&O for Brokers
Insurance agencies and brokers are sometimes in that group of organizations with uninsured D&O exposure and should not overlook how they, too, could benefit from D&O liability coverage.
For example, if an insurance agency or broker offers equity shares as a way to attract or retain personnel, the D&O policy could provide protection against allegations of unfair administration of those shares (e.g., disputes over equity, distribution and valuation). This is particularly true as M&A activity increases in the brokerage community (independent agents in particular). And, as agencies and brokerages grow and bring on new producers, there can be litigation between a producer’s current and former company over allegations of poaching.
Even when organizations believe they have the right corporate governance in place, some unique situations may leave board members exposed. To prepare for such “black swan” situations, Wallace advises that it’s all about preparation.
“Organizations, including agencies and brokerages, need to conduct tabletop exercises and run through ‘what-if scenarios’ to prepare themselves for possible problems,” he explains.
An organization’s leaders might consider how they would respond if they received a call informing them of a data breach. The what-if exercise would proactively resolve questions such as:
- Who would lead the resolution process
- Who would handle the insurance issues
- Who would deal with media inquiries
Ideally, there’s a strong risk management operation in place, and running through the scenarios will leave the organization in the best possible position to preserve its reputation, while responding quickly and effectively to an event.
Fortunately, agents and brokers don’t have to go it alone. The Hartford, for example, provides webinars and information about risk trends. Knowing more about these risks and learning the importance of cyber security can help identify phishing and spear-phishing attacks, allowing producers to know the exposures to watch for and be better prepared.
“We help our agent and broker partners better prepare for not only today’s issues but what may come in the future,” Wallace noted.
1 Business Insurance, “ESG Considerations Increasingly Factor Into D&O Underwriting”
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