2020 was a year of global economic disruption. Periods of uncertainty and market volatility heighten management exposure to liability risks, triggering class action lawsuits, derivative litigation, and other claims against management. Yet, the factors that typically drive corporate allegations apparently slowed during the global business “pause,” reflected in data showing the reduction of litigation against directors and officers in 2020. However, the 2020 downward trend is not anticipated to last. Emerging challenges shed light on an evolving management liability environment post-COVID-19.
When COVID-19 emerged in early 2020, the D&O insurance market transitioned smoothly in what could have been a disenfranchised, disrupted marketplace. Industry players were able to effectively pivot and adapt to new circumstances, which is a testament to the people, carriers and brokers who create and support specialty lines programs and services. Confronting emerging risks in a post-COVID world, the insurance industry will continue to collaborate with U.S. -based multinational clients to develop stable, sustainable programs that can withstand challenging times.
The D&O rate environment has trended upwards over the past several years. While the global pandemic fostered the continued hard market, today’s rate scenario was not exclusively a COVID-driven occurrence. Last year’s reduction in sector claims activity was, however, an aberration directly impacted by abnormal COVID provoked business conditions. Future claims emanating from the business environment surrounding the global pandemic will most likely impact D&O liability, fiduciary and employment practices lines, but may take time to materialize.
During the period from mid-March to September 30, 2020, approximately 16,000 “tips and referrals” had been triaged for investigation by the U.S. Securities and Exchange Commission (SEC), an increase of 71% over the comparable period in 2019. The Division’s Office of Market Intelligence opened more than 150 COVID-related inquiries and investigations, and recommended several COVID-related fraud actions to the Commission, according to the SEC’s 2020 annual report. These inquiries and investigations may ultimately foreshadow pandemic-related claims brought against corporate officers and directors.
When the pandemic gripped global economies, no country and, therefore, no multinational was spared. Businesses worldwide went into lockdown with many industry sectors struggling under non-revenue generating scenarios. In 2020,the share of billion-dollar public company bankruptcy filings neared an all-time high, according to New Generation Research, Inc.’s annual report. Public company executives may face greater risk of litigation both in the United States and in foreign jurisdictions due to solvency issues and regulatory scrutiny as countries strive to rebound their economies post-COVID.
The need for locally admitted D&O policies has become more urgent due to the anticipated threat of litigation against an individual director or officer who may be located anywhere in the world. Brokers and clients would be well advised to conduct due diligence and analyze the overall structure of the global D&O program, and look to identify the limitations of a single worldwide D&O insurance policy that is not issued in coordination with locally admitted policies. For example, in certain countries, a U.S.-based company, absent a locally admitted policy, may be prohibited from directly paying indemnity or defense expenses to that individual. Typically, a global master program with a local policy in place would allow for the local policy to be the first response of coverage. Also, local language policies adhere to foreign countries’ constantly changing rules and regulations. With D&O insurance, a decision as to whether to procure local policies can determine how and whether Side-A coverage, which provides direct coverage for a company’s directors and officers for a loss that has not otherwise indemnified, can respond for individual directors and officers—or not.
To learn more about structuring a multinational D&O program, download our global risk spotlight, Local D&O Policies Merit Special Consideration.
Jarrod Schlesinger is Executive Vice President, Public Company Management Liability, North America Financial Lines.
Patric Jones is Senior Managing Counsel, Global Multinational.
The opinions and positions expressed are the authors’ own and not those of Chubb. The information and/ or data provided herein is for informational purposes only and is not a substitute for professional advice. Insurance coverage is subject to the language of the policies as issued.