D&O Claims and Premiums Are on the Rise. How Closely Have You Reviewed Your Coverage?

A review of directors' and officers' coverage for companies operating internationally is a key consideration, according to a recent advisory from Chubb.
By: | September 30, 2021
Topics: D&O

Demand for directors and officers (D&O) insurance coverage increased steadily over the last several decades as multinational companies expanded global operations.

Given the current marketplace and litigation environment, multinational companies and others should periodically plan to take a close look at their D&O policies and programs to ensure they continue to address evolving risks.

Many D&O claims stem from securities-related lawsuits, with investors alleging directors and officers have breached their fiduciary duty when pursuing M&A transactions, which slowed some during the pandemic. The plaintiff bar’s increased pursuit of out-of-court “mootness fee” settlements has also limited such litigation in the recent past.

However, D&O claims likely will start increasing again. Litigation stemming from the surge in special-purpose acquisition company (SPAC) deals is still unfolding. And as economies continue to recover, M&A activity shows a general uptick.

What this all adds up to is that the top executives involved in a company’s overseas operations will increasingly be exposed to U.S.-style D&O litigation, according to a recently published Chubb advisory.

“Global companies have to have talented people to serve as officers and board members,” said Jarrod S. Schlesinger, executive vice president, Chubb Public Company Management Liability, Financial Lines, and one of the advisory’s authors.

“So securing proper D&O coverage around the world is very important for recruiting the right people for those positions, to cover their financial security and personal interests.”

Local vs. Global Policies

Some organizations seek to cover all of their directors and officers around the world under a single policy, and while that tends to be more straightforward and economical, different jurisdictions’ legal and compliance nuances can create limitations.

Most notable of these limitations is the potential inability of the carrier to directly adjust and/or pay claims on a worldwide basis, especially in jurisdictions that do not permit non-admitted insurance, the advisory said.

Non-admitted insurers cannot directly sell insurance policies in jurisdictions where they are not licensed. Global policies typically address Side A, which provides first dollar coverage (in the form of defense costs and settlements) for claims asserted against directors and officers, Side B, which provides reimbursement to the insured company for indemnification paid to directors and officers, and Side C, which provides the company coverage against securities claims.

Without a local policy, however, a single global policy may provide little or no protection in the form of Side A coverage in countries which prohibit non-admitted insurance, which may impact the assets of the individual directors and officers.

Jurisdictions that do not permit non-admitted insurance range from developing to developed countries. In those instances, companies should work with their brokers and insurers to obtain local coverage, or an insurer may be unable to directly pay indemnity or defense expenses locally.

“This means that individual directors and officers may be required to pay defense costs and indemnity sums themselves or make other arrangements for coverage,” the advisory mentioned.

The Benefits of a Local Policy

Illustrating the benefits of a local policy, the advisory notes a U.S.-based company that faced claims after an explosion at a subsidiary’s factory in Germany.

The authority’s investigation into whether the company’s directors and officers had inadequately implemented safety procedures resulted in more than €1 million in legal fees, which the company’s master policy did not cover, but the local policy did.

In another example, the director of a U.S. company’s Italian subsidiary faced a criminal investigation into whether profits were shifted illegally to an entity in lower-tax Switzerland.

The parent company’s U.S. policy had a single, aggregate liability limit of $25 million, with a $25 million retention. Fortunately, the subsidiary’s local policy had a $3 million limit and no self-insured retention, enabling more direct and efficient coverage of the director.

Finding the Right Insurance Partners

Patric Jones, senior managing counsel, global multinational for Chubb, emphasized the importance of working with brokers and carriers that have feet on the ground in the local jurisdictions,and understand those nuances.

“Even if the litigation is complex, at least the insurance coverage will be a little less complex in terms of that local director or officer who is facing a Side A claim,” said Jones, the advisory’s second author.

The advisory points out that multinational programs’ usual backstops, such as difference-in-conditions (DIC) and differences in limits (DIL) clauses, may not work for all individual directors and officers or provide significantly diminished coverage, unless a local policy is in place.

With rules and regulations governing local insurance always changing, risk managers and other corporate decisionmakers should carefully review their global D&O program, the Chubb advisory said, with “special attention” to the potential implications of Side A coverage for individual directors and officers. &

John Hintze is a freelance writer who can be reached at [email protected].

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