For D&O liability insurance, 2022 represented a year of continued market improvement. The hard market, which peaked in the third quarter of 2020, included a culmination of pre-pandemic underwriting challenges and even greater challenges brought on by the pandemic itself. The market began to stabilize in 2021 and, in 2022, rate increases decelerated, securities litigation filings decreased for a third straight year to levels of less than half of 2017-2019 historic highs, primarily due to a substantial decrease in merger objection litigation.
Yet, other factors arose throughout the year that warrant caution going forward. The economic resurgence in 2021 has been tempered by inflation and recession concerns, uncertainties surrounding global tensions, the advancement of environmental, social, and governance (“ESG”) disclosure regulation overseas and proposed regulation at home, as well as the anticipation of heightened bankruptcy filings.
With that as a backdrop, we recap select D&O liability and market issues of 2022 below and then look ahead to the environment of 2023.
The continued evaluation of ESG as a heightened D&O risk: Throughout 2022, organizations have addressed increasing pressures to focus on ESG practices from operational and investment perspectives. Regulation schemes overseas and proposed SEC climate risk disclosure rules have only enhanced exposures to regulators and shareholders. These exposures have resulted in increased underwriter scrutiny into ESG practices more broadly, more so on the “E,” or environmental and climate risk, aspect of the ESG acronym.
Over the course of the year, we have offered perspectives on ESG and D&O risk, including SEC announces proposed controversial new climate disclosure rule, The SEC’s ESG Disclosure Rules: Implications on advisers, funds, and investment management liability insurance coverage, and U.S. Department of Justice creates new Office of Environmental Justice. A timely and helpful overview of EU ESG rules on their impact on US companies can be found here.
A continuing trend of decreased securities class action (SCA) filings: SCA filings totaling 218 in 2021 represented just over half of average annual filings between 2017-2019.1 Through Q3 2022, 148 SCAs were filed which, annualized, would reflect under 200 filings.2 Fewer M&A related cases filed as class actions are largely responsible for the decrease since 2019. In fact, “core” filings (i.e., those without M&A allegations) in the first half of 2022 (105) remain consistent with the 1997-2021 semiannual average number of core filings (114).3 Conclusion: despite a significant decrease from recent record high filing frequency, current filing frequency is in line with historic norms.
We included a discussion of the 2022 SCA landscape in our publication Insurance Marketplace Realities 2022, Spring Update.
Restructuring/bankruptcy/insolvency: Chapter 11 bankruptcy filings through the third quarter of 2022 were below 2021 year-to-date filings.4 Nevertheless, there were unusually higher August and September 2022 Chapter 11 filings5, suggesting the possibility of an emerging trend of increased filing activity following the slowing or ending of government subsidies earlier in the year. Bankruptcy claims, which impact both private and public companies, can be among the most severe. In July, we wrote on the important need to monitor this develop with additional guidance in On bankruptcy watch: Directors’ and officers’ coverage in anticipation of Chapter 11 filings uptick.
Revised DOJ memorandum on criminal enforcement for corporate misconduct: In September, U.S. Deputy Attorney General Lisa Monaco issued a new memorandum elaborating on her prior October 2021 memorandum.6 The Department of Justice’s primary focus will continue to be enforcement against culpable individuals. The DOJ will determine how to treat corporations accused of wrongdoing based on the degree to which those corporations assist government investigations against individuals. It will also assess and take into account the corporate culture and compliance programs in place before and after the alleged wrongdoing and has also asked for $250 million in additional funding for corporate crime initiatives. In October, we provided commentary in our article DOJ adds more detail and color around its priorities and plans.
D&O risk post-Dobbs (overturning Roe v. Wade): Following the U.S. Supreme Court decision in Dobbs v. Jackson Women’s Health Organization,7 overturning Roe v. Wade, some companies are implementing protocols to assist employees in gaining access to health care services they may not be able to obtain in their own states. D&O risks arise as to possible violations of newly implemented state laws and related civil and criminal investigations and proceedings. We issued our perspective on the subject in Directors’ and officers’ risk in a post-Roe business environment.
Side A D&O in a captive? Delaware amendments to state indemnification law (Delaware General Corporations Code, Section 145(g): Changes to Delaware’s indemnification law in January8 authorized, with conditions, the use of captive insurers to cover D&O liabilities, whether or not the corporation would have the power to indemnify. The changes may ease previous concerns about the ability to insure Side A losses in a captive, particularly as to certain derivative lawsuit losses. Still, the amendments are silent on, and concerns persist, as to whether a captive may pay bankruptcy-related and other non-state law based Side A losses.
In February, we commented on this development in Side A D&O in a captive? Changes in Delaware law may ease some but not all prior concerns, as well as in our FINEX Flash webcast series “Do changes in Delaware law solve the ‘Side A in a captive’ D&O problem?” from March 31. On the related subject of alternatives to the traditional D&O insurance marketplace, we issued Use of alternatives to the commercial insurance market for D&O liabilities in July.
Directors and officers voiced their most significant risk concerns: Our understanding of D&O risk stems not just from market trends and leading legal authority, but also from the perception of risk by the very directors, officers, and risk managers that are most impacted. In our 9th Annual Directors’ Liability Survey, published in April 2022, we surveyed corporate officials from around the globe to determine their greatest risk concerns. In a year of uncertainty around climate risk, economic resurgence and solvency, it may have been a surprise to some that the top five risks identified by survey respondents were, in order, (1) cyber attack, (2) data loss, (3) cyber extortion, (4) regulatory risk, and (5) risk of a health and safety/environmental prosecutions and safety legislation. Our summary of the survey, along with commentary around its results, was published in our article, Directors’ Liability Survey 2022. We also released a North American Regional overview of the survey.
2022 was the year of continued D&O insurance rate increase deceleration: Coming off of more than two years of hard market conditions, the public company D&O liability insurance market in 2021 and 2022 experienced a significant deceleration of rate increases. The factor most responsible for the offsetting of hard market challenges was new insurance market capacity, predominantly in excess layers. This capacity inflow led to additional buyer leverage and an enhanced ability to address capacity challenges.
Our market perspectives took many forms in 2022, including our Insurance Marketplace Realities 2022 Spring Update – Directors and officers liability, and in our soon-to-be-issued autumn release, Insurance Marketplace Realities 2023 – Directors and officers liability.
Economic uncertainty: Economic recovery in the face of more than two years of a pandemic’s lingering effects is evident. Unemployment is at a historic low and both GDP and corporate profits are up. Nevertheless, interest rate, inflation and recession concerns continue to present issues around the strength and resilience of recovery.
ESG: Focus on ESG issues is likely to continue as more sub-components within the ESG umbrella become subject to regulation and investor scrutiny. As in 2022, directors and officers in 2023 are likely to be increasingly expected to take responsibility for oversight of more issues. With these expanded duties and more wide-ranging public statements will inevitably come continually expanding opportunities for litigation and regulatory exposures.
IPOs and SPACs: Initial public offering activity was down substantially in 2022, from 968 offerings in 2021 to 100 through H1 2022 (200 annualized). A downward trend is expected to continue due to proposed SEC rules and government scrutiny into SPACs and de-SPAC combinations. Yet, related SCA filings persist at high levels, with 2022 filings (21 through September) on pace to come in just under 2021’s record annual filings of 33. We also have observed that several SPACs have been unable to secure acquisition targets with contractual deadlines to do so approaching. We will monitor to what degree litigation may (or perhaps likely may not) arise from this emerging development.
Bankruptcy/insolvency: With the increase in Chapter 11 bankruptcy filings in the middle of 2022 and potentially through the remainder of the year, we are closely monitoring whether this trend will continue into 2023. As government subsidies and lending programs have largely phased out, in addition to higher inflation and tightening monetary policies, this remains a distinct possibility, along with the potential to adversely impact the commercial D&O insurance marketplace.
SEC pay versus performance and compensation clawback final rules: In the second half of 2022, the SEC issued final rules relating to executive compensation. The first, in August, implemented the “pay versus performance” disclosure requirements mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The final rule requires issuers to disclose the relationship between executive compensation actually paid and the company’s financial performance. WTW commented on the subject in SEC adopts final pay versus performance disclosure rules.
The second, in October, requires exchanges to establish rules requiring issuers to adopt compensation recovery, or "clawback," protocols where incentive compensation was based on erroneously reported financial information. Notably, clawback is required without regard to any misconduct or fault on the part of the executive officer. In SEC adopts executive compensation clawback rules, our WTW colleague offered his perspective.
Whether adoption of the final rules results in an increase in executive compensation D&O claims in 2023, of course, remains to be seen. As of now, D&O policies provide various levels of coverage relating to clawbacks but none cover, and we are not aware of a product that does cover the clawback amounts themselves (and the SEC rule expressly limits the use of insurance to cover clawback amounts).
Underwriting: the D&O liability insurance market is likely to remain stable into 2023: Increased capacity from newer market entrants since late 2020 and an improved securities litigation environment continue to drive more competitive market dynamics. Through Q3 2022, we have seen flattened-to-improved D&O premium outcomes, which we expect to continue into the new year. Newer markets initially generated rate relief in the excess layers; however, as markets continued to seek growth, several carriers have provided alternative primary competition and leverage. In addition, competition among insurers for Side A business has been reinvigorated following a protracted period of rate adjustment. Competition in this area has also been driven largely by newer market entrants, a phenomenon we expect to continue.
1 Cornerstone Research, Securities Class Action Filings, 2021 Year in Review, p. 4.
2 Stanford Law School, Cornerstone Research, Securities Class Action Clearinghouse, securities.stanford.edu, accessed October 17, 2022.
3 Cornerstone Research, Securities Class Action Filings, 2022 Midyear Assessment, p. 4.
4 Globe Newswire, Year-over-year U.S. Bankruptcy Filings Increase for Second Consecutive Month in September 2022, October 5, 2022
5 Id.
6 Assistant attorney general, criminal division principal deputy assistant attorney general, civil division
7 Supreme court of the united states
8 An act to amend title 8 of the delaware code relating to the general corporation law
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
