D&O claims trends and dangerous undercurrents in the UK SME Market
Directors are feeling the brunt of various D&O claims growth trends and a changing regulatory and legal environment. It is critical to understand where these increasing risk exposures are developing so that appropriate insurance and risk management strategies can be put in place to protect them.
Listed below are 7 growing areas of concern:
1. Insolvency actions, a “double whammy”
As the numbers of company and individual insolvencies rose in 2017, recent changes in the way the Insolvency Service deals with them are likely to have an impact on the numbers of prosecutions against directors.
Following rule changes from 2016, Insolvency Practitioners now must report on the circumstances of a business insolvency including, in all cases, the conduct of its directors for the 3 years prior to insolvency (it used to be just 2 years). Shadow directors now also have to be included in the report, which didn’t used to be the case, and the Insolvency Service now has 3 years after an insolvency, instead of 2, to bring disqualification proceedings against directors.
It is expected that this “double whammy” – making directors conduct more visible and giving regulators more time to react will inevitably feed through to an upturn in post-insolvency regulatory actions against individual directors.
2. You can’t legislate for people: unfounded allegations
Directors are often surprised to be on the receiving end of claims when they believe they have done nothing wrong. This trend is set to continue as emotionally fuelled actions, especially by “litigants in person”, still need defending.
In our experience it doesn’t matter how blameless the insured is; it is the attitude of the claimant that drives the claim. An aggressive and determined litigant can incur many thousands in costs and many months of time, even when their case has no legal merit. We see this typically when claimants feel very strongly about an issue and plunge ahead taking action without following any legal advice.
In the absence of professional guidance to advise about the facts of their case, irate and intractable claimants will no doubt continue to pursue bitter but groundless actions which can still be very time consuming for insureds, and very expensive for their D&O insurers, to defend.
3. HSE sentencing changes raised the financial stakes
Investigations and prosecutions by the Health and Safety Executive after a serious workplace accident are already a frequent source of D&O claims, and recent changes in the HSE’s fines raise the stakes even higher for the companies they investigate.
After a serious workplace accident the HSE will investigate the business and the individuals involved. If there has been a serious breach in health and safety law they will prosecute and press for the highest fines possible. The stakes were raised in 2016 when the levels of fines were substantially increased and 2017 saw more HSE business fines over £1m than in the previous 20 years put together.
Looking ahead, all this intensifies financial exposures after an accident. It’s now more important than ever that businesses and individuals have expert representation during an investigation to try to head off a prosecution, and expert representation during a prosecution to try and minimise the level of any fines.
4. Contract disputes an everyday part of business life
We are seeing increasing levels of D&O claims activity in relation to contract disputes, with clients embroiled in disagreements with suppliers or customers.
We see a wide range of contract dispute claims: such as refusals to pay invoices on the basis that the product or service in question did not do what it should have done, or disputes about whether contract terminations are in line with contract terms and conditions. Unsurprisingly in light of today’s global procurement, it’s not unusual for these claims to have an international dimension as well.
These types of entity claims are more commonplace than actions against directors for breaches of duty that D&O cover was originally designed for. Looking ahead we expect them to continue to increase as clients and brokers become more aware of the breadth of cover provided by their D&O insurance.
5. Wide and varied exposures presented by fiduciary duties
Directors have an array of fiduciary duties and we are seeing a general increase in D&O claims, usually initiated by investors, that directors have breached one or more of these duties.
Directors owe a range of duties to their company and its investors, which are in some cases very general such as the duty to “promote the success of the company”. We see a regular flow of claims about alleged breaches of these responsibilities, from authorising an unreasonably high executive remuneration package, to conflict of interest allegations about awarding a contract to another company that the director sits on the board of.
The general nature of the directors’ fiduciary duties presents wide-ranging management liability exposures. Looking ahead we expect the claims associated with these exposures to continue increasing as understanding of the scope of cover provided under D&O policies continues to improve.
6. Barristers, eDiscoverers and increasing defence costs
The overall costs of defending management liability claims against businesses and their directors are continuing to increase.
The costs of disclosure have escalated. The documents relevant to a case used to exist as hard copy letters and memos. Today vast quantities exist digitally, and the costs of finding and reviewing thousands of emails and texts, often via specialist eDisclosure experts, can be high. Additionally we see more willingness on the part of legal advisers to draw on barrister support for legal opinion, drafting documents, all of which increases defence costs.
Looking ahead the highly competitive legal market may slow a continuing increase in defence costs, but there is no question that the factors outlined above that have driven costs upward to today’s levels are here to stay.
7. PR and reputational protection: bad news travels fast
Insurers are paying out more and more for PR support to help insureds manage their external messaging after a claim.
Some events behind a D&O claim (eg investigations and serious accidents) can attract intense media scrutiny. News and speculation can be shared instantly reaching customers, suppliers and employees very quickly indeed. We have known insureds to be so preoccupied in dealing with the crisis at hand that they have not communicated effectively with these vital stakeholders – with detrimental (even fatal) impact on their business. This is why insurers are increasingly paying for clients’ PR support as part of a D&O claim.
At what may be a critical time for their business, clients may need professional expertise to guide their communication strategies and help build specific messaging for their customers, press and employees. With the accelerating speed of social media and online news platforms this trend is set to continue.
We are very grateful for our colleagues Kathryn Smith and Jonathan Henney at AIG D&O for help in pulling this blog together.