Why a robust D&O policy is now critical to global firms

For those executives leading the world’s biggest companies, corporate life has never been more hazardous in terms of the risk to personal reputation that increasingly onerous levels of regulation and corporate responsibility represent.

New and tougher rules mean that board members are under a constant and increasing threat of being sued, be it by shareholders, customers or employees. The chance of any litigation succeeding is higher than ever before given greater clarity over the roles and accountabilities of those that run companies.

The reputational risk for some potential directors is such that they will only sign up if they feel that the company has suitable D&O insurance in place, so that in the event of litigation they get the best possible protection.

Companies that are not willing to put in place the right insurance will face an uphill task in recruiting directors and other executives. In many cases, directors will demand D&O coverage as a condition of serving or employment because they do not want to put their personal assets at stake.

Indeed, on occasion, outside investors, such as venture capitalists or other private equity financiers, will require that D&O policies are in place before providing any funding for a business, as they take the view that D&O is a form of insurance for their investment.

Globalisation of businesses and the threat of multiple actions across jurisdictions have also added to the pressure on companies to ensure they have the right level and type of D&O insurance. Importantly, the issue has also become increasingly international and not just confined to the US, with large businesses in Brazil, the UK and Germany all being the subject of recent high-profile cases.

Additionally, the fallout from the global financial crisis has had a pivotal role in increasing demand for D&O policies as regulators, including the UK’s Financial Conduct Authority, impose rules such as the Senior Managers Regime on financial service companies. The regime focuses on individuals who hold key roles and responsibilities in relevant firms. The new regime came into effect earlier this year and involves allocating and mapping out responsibilities and preparing statements of responsibilities for individuals carrying out senior roles.

While managers who fall under this regime continue to be pre-approved by regulators, firms are legally required to ensure that they have procedures in place to assess their fitness and propriety before applying for approval. Again the regime provides a rigid framework for executives to be judged against, increasing the chances of successful litigation, and for D&O.

D&O liability insurance protects directors and officers in the event they are personally sued, often in addition to the company being sued, by investors, employees, vendors, competitors, and customers, among other parties. The insurance protects directors and officers by covering legal fees, settlements, and other costs; in addition, the coverage sometimes can extend to protect the company if it is named in a suit, as well.

Executives can be sued for a variety of reasons, including misuse of company funds, misrepresentation of company assets, fraud, failure to comply with workplace laws, and lack of corporate governance.

A ‘Directors’ liability’ survey conducted by Allen & Overy and Willis Towers Watson, published in May 2016, found directors’ biggest fears revolve around the risks they face in relation to regulatory investigations and inquiries.The corporate and global headwinds outlined above mean that demand for D&O insurance has been gradually increasing over the last few years across all sectors and among both public and private companies. Insurance companies such as Aspen have been working hard to ensure that they can provide exactly the right sort of product and level of cover that does not leave a particular individual or company exposed to an unforeseen risk.

For eligibility and rates, D&O insurers look at many different aspects of the business, including the type of business, the company's profit, claims experience and the amount of debt. There are a few different types of D&O, although often the cover is contained in a portfolio of products and insurance carriers have different packages, including varying levels of coverage and the ability to add additional coverage levels.

The Allen & Overy and Willis Towers Watson survey reported that when it comes to D&O policy coverage, directors are most concerned that their policies have easy to follow terms, cover the cost of initial investigations and respond to claims in all jurisdictions.

Brokers are vitally important in terms of advising companies on the right sort of D&O insurance. Some of the issues for companies and their brokers to consider when shopping for a policy include the following:

• Should coverage be limited to directors and officers or include coverage for the company, as well?
• Where coverage does include protection for the company should directors and officers be purchasing additional Side A only / defense costs only layers in addition to the main program?
• Does the policy cover the full range of claims, from regulatory breaches to employment?
• Do insurers have the correct licenses to pay a claim on behalf of a subsidiary company whose domicile differs from that of the parent company?