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D&O insurers are getting “unsettled” amid heightened regulatory scrutiny and increased class action activity, making placements more difficult and premiums costlier, according to a major insurance broker.
Michael Herron, Gallagher’s national head of financial and professional risks, said that while D&O policies are “ostensibly designed for directors and officers,” it is the add-on Side C cover - which protects the company and its D&O from claims made against them - “that’s driving up D&O insurer payouts.”
“Some insurers are reducing risks and others are withdrawing from the market completely, walking away from long-standing client relationships.” Herron said. “Placements have become much more difficult and much more expensive, with insurers seeking premium increases of between 40–400%, even if they already increased substantially in the prior year.”
So far, no Australian securities class action has reached final court judgement for liability, with most cases having been settled to put a lid on expenses.
Gallagher said legal protocols designed to facilitate class actions are also to blame for the massive spike in claims, causing insurers to defend more D&O claims and face alarming financial consequences.
“The legal protocols designed to facilitate class actions have also attracted third-party litigation funders and increased the frequency of claims, in some cases with multiple actions brought by competing plaintiff firms – and competing litigation investors,” the broker said.
The broad basis for determining executive misconduct also heightens the risk of class actions, the broker noted, as it stressed the importance of full disclosure to key stakeholders.
“Inaccurate or incomplete statements can manifest as misleading and deceptive conduct in failing to disclose certain information, with a breach of ASX continuous disclosure obligations forming the basis for most Australian shareholder class actions,” Gallagher said. “No proof of intent to defraud
shareholders is required, rather the charge rests on interpretation of how information, or lack of it, has been received. The key question considered by D&O insurers is whether information pertaining to issues that may be latent in a business for a period of time and are known by executives to be a problem has been disclosed to key stakeholders.”
To defuse the risk of shareholder class actions, Gallagher believes the key is timing.
“What is catching boards out is the timing: the potential for an issue to become market sensitive and when this information should be disclosed,” it said. “Typically, it is a corporate shock that generates a D&O claim.”
The broker also advised companies to be upfront with their insurer about “what could come as a surprise” to their stakeholders, and the extent by which they can mitigate or avoid that risk.
“The question companies need to consider is how they can unpack their perceived risk and represent their situation in a way that compels insurers to recognise their strengths,” Herron said. “They also need to be strategic when they go to market. It may be of benefit to set renewal dates with one eye on financial reporting and corporate activity to obtain an optimum outcome. It’s a balance that requires strategy and real thoughtfulness on the part of the broker.”
