Hidden liability risks from DEI to ESG lurk beneath deregulation, Markel warns

Less red tape but more red flags expected from the liability fallout of policy shifts.

The red tape might be vanishing, but so are the guardrails. As US politics tilts toward deregulation, the insurance industry is bracing for the ripple effects.

“Reduced regulation doesn’t mean reduced risk,” stated Sandra Soares (pictured), head of professional liability at Markel Bermuda. “The arrival of a new administration invariably brings with it shifts in regulatory landscapes, policy priorities and economic conditions,” she explained, in an exclusive interview with Intelligent Insurer. “These macro environmental factors can significantly impact various sectors, including the insurance industry.”

At first glance, deregulation might seem like good news: fewer constraints, lower compliance costs and regulatory rollbacks suggest a more forgiving operational environment. But Soares believes the implications are far more complex – and far more dangerous – for insureds concerned about their professional liability exposures.

“While these changes may reduce present day litigation activity, these actions and their effects could have broader, long-term consequences,” she explained. “Reduced regulations can also mean there are fewer safeguards in place to prevent professional misconduct or errors. Businesses may take on more risk without the same level of oversight, and this could potentially increase the frequency and severity of claims.”

This recalibrated risk profile might prompt insurers to raise premiums or tighten underwriting terms – especially in sectors that are historically vulnerable to missteps. Financial services is one such sector, and Soares sees echoes of 2008: “Deregulation in the banking and financial services sector could have a variety of impacts.” 

While it might enhance profitability and encourage innovation, the absence of strong external controls raises concerns. “The regulations that resulted from the 2008 financial crisis were designed to enhance the stability and resilience of the financial system, protect consumers and essentially prevent excessive risk taking,” Soares stated. Weakening them now, she warned, could undermine long-term institutional health.

Corporate compliance with anti-bribery laws also faces a more uncertain future, and Soares flagged a potential pullback in enforcement under the Foreign Corrupt Practices Act (FCPA), including fewer investigators, dropped cases and possible legal changes. Even so, she warned: “The FCPA violations that are committed today could remain subject to prosecution over the next five years.”

Soares also reminded companies that enforcement wasn’t only a US issue. “It’s highly unlikely the countries with anti-bribery laws, such as the UK Bribery Act of 2010, will have similar near-term reduction of enforcement,” she added. Geographic scope does not equal immunity.

Tariff policy is another growing exposure, especially around disclosure. Public statements must reflect setbacks due to supply chain disruptions or costlier alternatives, because down the line, “if a company’s performance is negatively impacted by tariff policy and its disclosures don’t adequately acknowledge those risks, it could absolutely create disclosure risk”.

Soares suggested the Covid pandemic offered a preview of what was to come. “Supply chain disruption-related lawsuits were filed during and after the pandemic,” she said, hinting that the same logic could apply to tariff-induced delays. 

“Businesses may take on more risk without the same level of oversight, and this could potentially increase the frequency and severity of claims”

DEI, ESG & FCPA: the alphabet soup of liability

Disclosures also may provide shareholders and plaintiff attorneys with an opportunity to “allege which misleading statements were made if a company fails in its transition efforts,” Soares stated.

The landscape becomes even more fraught with recent government reversals on DEI (diversity, equality and inclusion) and ESG (environmental, social and governance). Government pressure to scale back diversity initiatives, coupled with the SEC’s (Securities and Exchange Commission) decision to abandon newly finalised climate disclosure rules, creates a double bind for corporations.

“An emerging risk could arise from government authorities launching litigation against companies with DEI policies that don’t align with the administration’s view,” Soares commented, acknowledging at the same time, that companies that reversed their policies could also face employee lawsuits from staff alleging that the updated employment practices are discriminatory.

There are reputational risks too. “This change could be perceived by their employee base as a lack of commitment to diversity and inclusion, potentially leading to negative publicity and loss of trust,” Soares added.

On ESG, the SEC’s policy shift is forcing more uncertainty. “These guidelines were just finalised in March 2024,” Soares said of the abandoned climate disclosure rules, while recommending public companies still to proceed with care to avoid attracting attention from regulators or activist groups.

How should insureds respond to this increasingly fragmented regulatory environment?

Soares urges caution and clarity. “Companies operating within this evolving macro-economic geopolitical environment need to continue to be prudent with their disclosures,” she said. “This will bolster resiliency to face whatever professional liability obstacles may come their way.”

She also rejected the notion that less regulation meant less litigation. “Although a corporate-friendly policy environment may reduce regulation, this doesn’t necessarily translate to a reduction in private litigation,” she observed. “The plaintiffs’ bar will be waiting patiently for any missteps or wrongdoings.”

As the market braces for further turbulence – be it legal, political, or economic – Markel Bermuda is leaning into its experience. “We’ve navigated quite a few administrations,” Soares concluded. “Our extensive professional liability experience and strong understanding of US and international companies enables us to guide insureds with sound strategies to manage risk and provide creative solutions for their professional liability coverage.”

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