WTW’s Financial, Executive & Professional Risks (FINEX) Practice collaborates with professionals throughout the directors’ and officers’ (D&O) liability insurance industry to gain perspective into the many facets of our business. In our “D&O Professionals Series,” we feature professionals from various corners of the industry, from executive D&O underwriters to securities litigators to coverage counsel and others. Our objective is to discuss how ever-changing conditions in the broader economy and in business have impacted D&O risk, securities litigation and our industry more broadly.
With a focus on the U.S., Andy Moss and Noel Paul of Reed Smith LLP discuss the critical issues shaping the responsibilities and risks faced by directors and officers today, from economic volatility, to how FIs are making significant investments in AI technology. Join us as we dissect these topical developments.
WTW: What developments have you seen in D&O risk for global financial institutions over the past few years? How does the position differ for commercial organizations?
Reed Smith (RS): The world economy has improved steadily since the upheaval of COVID-19 pandemic, but volatility and uncertainty remain in some financial sectors. In the United States, global financial and other commercial organizations continue to face both old and new issues with respect to directors’ and officers’ liability risk.
WTW: What D&O risks do you predict becoming significant in the near future and does this differ between global financial institutions and commercial organizations?
RS: Continued economic volatility. Current D&O risk includes concerns over financial institution liquidity leading to bank mergers and acquisitions, cyber security risks, SPAC mergers, the marketing and use of artificial intelligence tools, supply chain disruptions due to cyber events, infrastructure, weather and natural disasters, the impact of inflation (which appears to be receding), higher interest rates (which are projected to start falling), labor pressures, and continued concerns with companies’ responses to and preparedness for a global pandemic. Regulatory enforcement and civil litigation risks concerning ESG-related issues increasingly occupy the time of corporate boards, prompted by expanding reporting and disclosure requirements, as well as shareholder challenges and legislative scrutiny. Changing patterns in the use of commercial office space and the surge in hybrid work arising out of the COVID-19 pandemic have impacted the commercial real estate sector and thus weighed on financial institutions.
Increased cybersecurity and AI D&O risk. Along with navigating these choppy waters, companies face new challenges in managing their D&O risk exposures. One of the more well-known recent D&O challenges are new cyber security rules enacted by the U.S. Securities & Exchange Commission (SEC), which require publicly traded companies to publicly report cyber events to the SEC within four days of determining that the event is “material,” and to report the state of their cyber security practices annually. In May 2024, the SEC also adopted amendments to long-standing rules that require registered investment advisors (RIAs) and other SEC registrants to adopt written policies and protocols to safeguard customer information. The amendments require RIAs and other companies to implement a written incident response program to detect, respond to and recover from unauthorized access to customer information, and to perform oversight of service providers. Notably, the new amendments further require RIAs to provide detailed notification to customers of a data breach involving their information "as soon as practicable" within 30 days after becoming aware of the incident.
There also is a potential for AI to become a material D&O risk given that many companies appear to be poised to make significant investments in AI technology, and scrutiny by U.S. state regulators is growing. AI may open opportunities for profit growth but also creates significant risks, such as threats to cyber security, intellectual property infringements, disproportionate investor expectations, privacy risks and increased exposure to copyright law violations for certain companies. Securities claims, breach of fiduciary duty and misrepresentation claims and shareholder and derivative lawsuits may arise out of companies’ initial investments into AI technology.
Expansion of officer liability. In the U.S., courts, administrative agencies and legislatures have expanded potential liability for corporate officers accused of oversight or financial misconduct, potentially creating additional targets and increased financial exposure in regulatory enforcement and civil actions. For instance, the Delaware Chancery Court (the premier state court for resolution of corporate governance disputes) recently broadened the scope of potential liability for corporate officers by holding that executives, and not just board directors, may be liable for failing to oversee risks related to their areas of direct control. The court held that corporate officers are responsible for oversight with respect to compliance risks within areas under their control and management.
In the for-profit education space, the Office of Federal Student Aid (FSA) recently issued requirements that individual executives who exercise substantial control over these educational institutions sign an agreement by which they assume personal liability for financial losses incurred by the federal government.
WTW: How do you think that companies can maximise their D&O insurance recoveries?
RS: D&O insurance as front-line protection: Companies can take certain straightforward measures to maximize their recoveries of D&O insurance. First, companies should be familiar with the notice requirements and key terms and conditions in their policies – including whose knowledge and what information triggers notice obligations. Giving timely notice of a claim is critical to securing coverage for a covered claim and avoids one of the most significant pitfalls corporate policyholders face in attempting to recover their insurance.
Second, companies should understand their own obligations under D&O policies. Policies generally require consent to retain defense counsel and in some cases may require selection of defense counsel from pre-approved lists of “panel counsel.” All D&O policies require policyholders to cooperate with and provide the insurer with a meaningful opportunity to participate in the settlement of a claim. Just as critically, all policies require prior consent to enter into a settlement. Working with your insurance carriers toward the defense and resolution of a claim is vital to maximize insurance recovery.
Third, resolve coverage issues promptly. In the event that an insurer raises potential defenses to coverage, companies should respond promptly and attempt to resolve any differences in advance of settlement discussions.
Fourth, companies should review their coverage annually from a holistic viewpoint along with other coverage (including but not limited to employment practices liability, fiduciary liability and cyber liability) to identify any potential coverage gaps and enhancements in the insurance marketplace that can help fill those gaps. Because of the constantly shifting risk environment, companies should assume that updates to their policies may be needed and include a rigorous review of their coverage as part of their renewal process each year.
Fifth, a key part of understanding the mechanics of D&O insurance is working with a skilled insurance broker. Knowledgeable and experienced insurance brokers are essential to obtaining adequate insurance coverage for their clients, and can provide valuable advice in obtaining coverage enhancements when policies are renewed and providing claim advocacy services in the event a claim arises.
WTW: WTW’s Global Directors’ and Officers’ Survey this year showed a big change over previous years, with the subject of “Health & Safety” coming out as the number one risk concern for directors and officers. Even for the finance and insurance sector, Health & Safety appears as the number four risk for directors out of 28 (having not been in the top seven at all for the finance and insurance sector last year). Does that reflect your expectations and what do you think could be the reason for the change?
RS: Health and Safety risks continue to be one of top concerns of directors and officers, as the world continues to stabilize from the COVID-19 pandemic, and many businesses continue to evolve in response to the pandemic. The pandemic transformed the balance of relationships between employers and employees, including a strong generational component where new employees have a different range of expectations and needs compared to experienced employees. Adopting policies and planning for future workplace health issues, including potential pandemics, remains a key topic for corporate boards and management.
