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Regulatory Risk

D&O’s Shifting Risks

Navigating the changing compliance environment has never been more challenging for companies.
By: | October 12, 2017 • 4 min read

Corporations obtaining cooperation credit during Department of Justice investigations became virtual whistleblowers on individuals involved in misconduct, a Sept. 9, 2015 DOJ memo intimated.

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The memo got Rob Yellen’s attention. The North American product leader for directors and officers and fiduciary liability insurance product at Willis Towers Watson, FINEX, describes the memo as a product of the “individual accountability era.” Enforcement agencies have been criticized, “fairly or not,” he said, “for not holding more individuals accountable during the financial crisis.”

Now, when an employee breaks the law, you are required to notify the DOJ and provide all supporting documents. Moreover, internal efforts to resolve the legal breach should include criminal or civil liability protection for the miscreant.

“Given this, ensuring that your directors and officers liability policy has those heightened enforcement dynamics in mind is essential,” Yellen advised.

Navigating a Potential Labyrinth

The memo was also a game changer for Louis Lucullo, chief underwriting officer, financial lines, Americas AIG. Memorializing more stringent aspects of settlements sought by a regulator would have an impact on Side A of a D&O tower. Companies could possibly be “unable to indemnify if they were providing information about wrongdoing … as a result, we now see companies buy more Side A as a portion of their total D&O limits.”

Rob Yellen, North American Product Leader for directors and officers, and fiduciary liability insurance product, Willis Towers Watson, FINEX

That rings true for John Phelps, director, business risk solutions at Florida Blue and former RIMS president. Though, he notes, much depends on the state “and how liberal your indemnification can be in your bylaws.”

Florida allows one of the broadest indemnification provisions that can be included in bylaws. Phelps noted that “it makes sense to have Side A for protection in case something does slip through your coverage B.”

The complexities of indemnification, Lucullo adds, suggest that Side A alone should not be considered for bankruptcy scenarios. Situations occur “where a company is not able to indemnify or the wrongful refusal to indemnify provides for the advancement of defense costs under the Side A policy.”

Additionally, changes to federal laws impact the way state and other regulatory bodies respond to meet their own legislative obligations. “You might see local regulators step up and put their own regulations in place,” said Yellen.

The danger is the potential for “balkanization.” Suddenly, you’re fighting battles on multiple fronts. There’s a possibility for significant investigative redundancies and costs as you try to comply, and the rules and enforcement demands may vary from one authority to another. “If multiple enforcement authorities are involved, it gets complicated … and ultimately costs more as you respond,” said Yellen.

Shared Coverage Pitfalls

Many are taking a wait-and-see approach, including Shanda Davis, Travelers D&O product manager for Bond and Specialty Insurance. “We’re going to see how that plays out, but certainly states have different regulations today.”

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Whatever regulatory gaps the states and local governments need to fill, she said, a comprehensive D&O program is crucial, whether public or private.

“You need that in place, to protect assets of the personal side of [directors and officers] and to attract and retain qualified executives and board members.” No one will join a company if there’s the smallest hint they might go unprotected if unfairly suspected of wrongdoing or if someone else in the company goes rogue.

Yellen added, “You don’t know everybody you’re sharing your coverage with. You want to make sure you’re going to be judged on your behavior, not the behavior of somebody [less] concerned about cooperating with the insurer.”

“You want to make sure you’re going to be judged on your behavior, not the behavior of somebody [less] concerned about cooperating with the insurer.” — Rob Yellen, North American Product Leader for directors and officers, and fiduciary liability insurance product, Willis Towers Watson, FINEX

Full severability of the application “is a critical element if you’re advising someone to buy D&O,” agreed Lucullo, “because you don’t want to invalidate your entire D&O policy due to the acts of one wrongdoer.”

While regulatory investigation coverage for individuals might be covered already, some might view the expansion of regulatory investigation under D&O for the corporate entity “as a dilution of limits,” said Lucullo, because individuals expect coverage. To address that issue, you can simply buy investigation coverage in a standalone policy, he noted. &

David Godkin is a freelance magazine writer based in Toronto. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2018 Risk All Stars

Stop Mitigating Risk. Start Conquering It Like These 2018 Risk All Stars

The concept of risk mastery and ownership, as displayed by the 2018 Risk All Stars, includes not simply seeking to control outcomes but taking full responsibility for them.
By: | September 14, 2018 • 3 min read

People talk a lot about how risk managers can get a seat at the table. The discussion implies that the risk manager is an outsider, striving to get the ear or the attention of an insider, the CEO or CFO.

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But there are risk managers who go about things in a different way. And the 2018 Risk All Stars are prime examples of that.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Goodyear’s Craig Melnick had only been with the global tire maker a few months when Hurricane Harvey dumped a record amount of rainfall on Houston.

Brilliant communication between Melnick and his new teammates gave him timely and valuable updates on the condition of manufacturing locations. Melnick remained in Akron, mastering the situation by moving inventory out of the storm’s path and making sure remediation crews were lined up ahead of time to give Goodyear its best leg up once the storm passed and the flood waters receded.

Goodyear’s resiliency in the face of the storm gave it credibility when it went to the insurance markets later that year for renewals. And here is where we hear a key phrase, produced by Kevin Garvey, one of Goodyear’s brokers at Aon.

“The markets always appreciate a risk manager who demonstrates ownership,” Garvey said, in what may be something of an understatement.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Dianne Howard, a 2018 Risk All Star and the director of benefits and risk management for the Palm Beach County School District, achieved ownership of $50 million in property storm exposures for the district.

With FEMA saying it wouldn’t pay again for district storm losses it had already paid for, Howard went to the London markets and was successful in getting coverage. She also hammered out a deal in London that would partially reimburse the district if it suffered a mass shooting and needed to demolish a building, like what happened at Sandy Hook in Connecticut.

2018 Risk All Star Jim Cunningham was well-versed enough to know what traditional risk management theories would say when hospitality workers were suffering too many kitchen cuts. “Put a cut-prevention plan in place,” is the traditional wisdom.

But Cunningham, the vice president of risk management for the gaming company Pinnacle Entertainment, wasn’t satisfied with what looked to him like a Band-Aid approach.

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Instead, he used predictive analytics, depending on his own team to assemble company-specific data, to determine which safety measures should be used company wide. The result? Claims frequency at the company dropped 60 percent in the first year of his program.

Alumine Bellone, a 2018 Risk All Star and the vice president of risk management for Ardent Health Services, faced an overwhelming task: Create a uniform risk management program when her hospital group grew from 14 hospitals in three states to 31 hospitals in seven.

Bellone owned the situation by visiting each facility right before the acquisition and again right after, to make sure each caregiving population was ready to integrate into a standardized risk management system.

After consolidating insurance policies, Bellone achieved $893,000 in synergies.

In each of these cases, and in more on the following pages, we see examples of risk managers who weren’t just knocking on the door; they were owning the room. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, clarity of vision and passion.

See the complete list of 2018 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]