Directors’ and Officers’ Liability (D&O) market
2020 was a challenging year for the Directors’ and Officers’ Liability (D&O) market, as 2021 begins we are seeing the results of these challenges with the resultant impact on potential claims.
During the pandemic, businesses were operating in an unknown environment, COVID-19 accelerated the move to remote working, business continuity plans were tested to the limit, health and safety plans were rewritten and key decisions were made by Directors’ and Officers’ to allow businesses to continue.
Unsurprisingly, these challenges remain and will do so for some time. What has become clear, is that decisions made during the pandemic response, may, even if not directly related to COVID-19, be contributing to a rise in claims litigation, with some firms reporting a 40% year-on-year rise and predicting further increases to come.
Not all management liability claims will arise from the pandemic, in uncertain economic times claims can arise from a number of stakeholders and circumstances. However, the pandemic and a company’s response can contribute to potential claims scenarios. Increased focus on responding to the changing nature of business due to the pandemic can also result in other areas of management being overlooked.
Directors’ & Officer’s Liability insurance protects both a company and its directors’ and officers’ against claims arising from their legal liability or statutory duties. Cover is often purchased as part of a Management Liability policy which may also include Employment Practices Liability (EPL) cover to provide insurance against claims arising from employment matters such as alleged discrimination, employee harassment or unfair dismissal.
Employees are a regular source of claims under management liability policies where EPL cover is purchased. The COVID-19 response of a business may have resulted in furloughing of staff or unexpected redundancies. Loss of goodwill between employees and employer can result in a flurry of legal actions as employees seek redress.
A potential scenario would be an employment tribunal claim if an employee felt they were unfairly targeted for redundancy due to discrimination, e.g. sex or race. Defence costs can be significantly more than the cost of the claim.
Where companies have outside investors, the directors’ have a duty to those shareholders to act in the best interests of the business. Any perceived deviation from this can result in shareholders making claims. If shareholders believe that a company’s COVID-19 response or just its general day-day to business operations have been negligent or negatively impacted performance, they may look to bring a claim either individually or as a group (a class action).
Irrefutably, the impact of COVID-19 will result in company insolvencies. Where creditors feel that a business has not been correctly managed, they may examine the decisions taken by the directors’ and officers’ with a view to holding them personally responsible. Allegations such as the knowing continuance of trading whilst insolvent, may result in individuals being held responsible for the increased debts incurred by creditors.
Changing litigation landscape
In the UK, increasing class actions and changes to legal and regulatory environments has changed the landscape for UK Management Liability and as a result has impacted on the Insurer market.
It is clear that COVID-19 either directly or indirectly, will very likely to lead to D&O liability losses, and it is noteworthy that even those claims with little chance of success will cost time and money to defend.
The uncertainty of claims potential is causing unrest within the market impacting premiums and availability of coverage. As Matrix advises our clients, when seeking management liability insurance or renewal, information and timing are key. Be proactive, engage with your advisers, ensure that information is updated and readily available and start the process early. Management Liability insurance is becoming more critical to a business than ever.