Post-Pandemic Shifts Create Risks for Private Company Execs, Certain Business Sectors

In the post-pandemic landscape of 2024, the private company management liability insurance market is bracing for new economic challenges, regulatory uncertainty, return-to-office mandates, and shifting workforce culture, all of which pose significant risks to companies and their directors and officers, according to a report by Munich Re.

According to Munich Re, liability trends could add pressure to increase management liability insurance rates, after several years of lower claims activity and new capacity caused rates to decrease during the COVID-19 pandemic.

“For directors & officers insurance, public companies tend to draw more attention and scrutiny, but private companies still face significant risks for their directors and officers. While they are less likely to face securities class actions lawsuits and hefty Securities and Exchange Commission (SEC) fines, private companies, along with their directors and officers are still subject to business litigation, regulatory investigations, and disgruntled investors,” the report noted.

The expiration of government pandemic financial support is revealing underlying business model problems at some companies. Company debt has jumped 18% since 2020, impacting profitability. Amid these economic shifts, vulnerable sectors include commercial real estate, retail and hospitality, and electric vehicles, according to Munich Re.

Areas to Watch

• Commercial real estate is facing lower occupancy rates and falling rents while mortgage rates remain high. The national vacancy rate of 18.2% is 60% higher than Q4 2019, forcing companies to compete for rates to attract and retain tenants, according to the report. The national average full-service equivalent listing rate was $37.74 in March 2024, down 1.3% in the last 12 months. This combination of lower demand and falling rents is especially concerning as mortgage interest rates are close to 7%, nearly three times the rates from early 2020, the report stated.
• Retail and hospitality are at risk if consumer discretionary spending drops due to rising housing and energy costs. A recent study shows, for example, that spending on clothing and footwear is down 36% year-over-year as of April 2024, the report said. Leisure travel spending has dipped 3.1%,  and if housing and utility costs continue to rise at their  11.8% year-over-year rate, problems could lie ahead for this industry that relies on discretionary spending, according to Munich Re.
• The electric vehicle market growth is slowing as the ecosystem is not fully ready to support widespread EV adoption, the reinsurer stated. Around the globe, 14 million electric vehicles were registered in 2023, accounting for 18% of all car sales. However, major automakers including Ford, GM, Mercedes-Benz, Volkswagen, Jaguar, Land Rover, and Aston Martin have all announced plans to delay or scale back EV launches. Recent events have shown that the automotive ecosystem isn’t quite ready for an all-electric future, according to the report.

An economic downturn impacting any of these sectors drives up the potential for lawsuits against struggling companies and their directors and officers, the report stated. As companies try to turn around their businesses, they may face increased scrutiny and legal action related to their tactics. These may include merger objection lawsuits, freeze out mergers, breach of fiduciary duty, mismanagement, and bankruptcy lawsuits, per the report.

Regulatory Uncertainty in 2024

The regulatory landscape for businesses in 2024 is uncertain, with several factors potentially impacting the stringency of enforcement and the enactment of new regulations. The outcome of the 2024 presidential election and key Congressional races may determine the direction of regulatory policy in the coming years, with the possibility of regulations being enforced more strictly, new regulations being enacted, or existing regulations being rolled back or eliminated.

Adding to the uncertainty is a recent Supreme Court ruling that could have significant implications for the regulatory environment. I

“Business leaders should pay close attention to the recent Supreme Court ruling in Relentless, Inc. vs the Department of Commerce, which eliminated the Chevron deference doctrine,” as this decision may lead to increased legal challenges to regulations and potentially result in a more lenient regulatory environment, the report stated.

Companies that face regulatory fines or penalties as a result of enforcement actions can suffer negative consequences beyond the financial impact of the fines themselves. Negative publicity surrounding regulatory enforcement can damage a company’s reputation, while significant fines can lead to financial troubles.

Return-to-Office Mandates

As companies look ahead to 2024, a whopping 90% of employers plan to enforce return-to-office mandates, up from only 51% of employers in 2023, Munich re reported. While bringing workers back on-site may boost collaboration and company culture, it also opens the door to potential lawsuits over inconsistent exemptions and perceptions of bias.

Employers will need to tread carefully as they implement these policies. Uneven application of remote work privileges or in-office requirements could spur legal action from employees who feel they have been treated unfairly.

“Perceptions of bias, inconsistent enforcement, or unequal standards can drive legal action, especially if employees perceive gender, racial, or disability bias,” the report noted.

Failure to ensure return-to-office mandates are carried out equitably could lead to an uptick in D&O liability claims and employment practices liability lawsuits, per the report.

Shifting Workforce Culture

As workers return to the office in the post-pandemic era, they bring with them a new set of expectations and sensitivities shaped by recent cultural and generational shifts, according to Munich Re.

The workforce is younger and more socially aware than ever before, with Generation Z, born between 1997 and 2012, making up 15% of the U.S. workforce in 2024. This generation is less religious and more focused on social issues than their predecessors, potentially leading to clashes of opinions with older colleagues, the report states.

The heightened awareness of social issues and personal identity has led to a lower tolerance for inappropriate behavior in the workplace.

“What was once shrugged aside or ignored in pre-pandemic office culture may be less tolerated by younger and more socially aware workers,” the report’s authors note. “This may lead to an increase in employment practices claims (sexual harassment, racial discrimination, ageism, and more) now that more workers are back in the office.”

Leaders who are perceived as allowing an intolerant or discriminatory culture to persist may face D&O claims. When employment practices lawsuits lead to negative publicity and substantial settlements, that can impact a company’s financial performance and valuation, the report adds. Shareholders who experience a drop in their investment value may seek legal recourse from the executive team that failed to address the workplace environment.

Access the full report on Munich Re’s website. &