Top 10 Challenges Directors & Officers Face in 2015

Whether addressing a complex securities claim, a parallel government investigation or a lawsuit related to a cyberattack or merger, directors and officers continue to face complex challenges in today’s environment. Still, many executive boardrooms do not plan ahead when it comes to addressing director and officer (D&O) exposures. The following lists the top 10 challenges directors and officers face and how directors and officers can put their house in order.

1. Uncovered Claims

Insureds are often forced to absorb uncovered expenses due to broad exclusionary language contained in typical D&O policies. Examples of theses exclusions include insured versus insured, bad conduct, and/or breach of contract. To help prevent uncovered claims, it’s important to work with a qualified professional who can draft and design carrier-specific endorsements and revisions that will provide broad grants of coverage and reduce exclusionary language. These manuscripted policy changes combined with negotiated terms ensure clients are afforded as expansive of coverage as possible.

2. Pricing Pressure

Private company insureds are experiencing modest increases in rates as well as stricter underwriting. Carriers increasingly are requiring access to the C-suite and asking for more data points to underwrite. To alleviate price increases, analyze the risk in depth and strategically present the company to underwriters, as well as use analytics and benchmarking in order to receive optimal limits, pricing, retentions and terms.

3. Government Investigations

The government continues to aggressively pursue criminal and civil investigations against public companies and private companies. The frequency and cost of defending these investigations and often parallel securities lawsuits have risen dramatically. As a result, D&O programs need to be created with broad coverage for investigations and to maximize covered defense costs. This can come in very handy. For example in a recent case, a company’s executives were asked to appear for interviews and to produce documents to the SEC. USI guided the company and its defense counsel in how to maximize broad pre-claim inquiry coverage, resulting in $250,000 to $750,000 in covered expenses that would likely have otherwise been uncovered.

4. SEC Targeting Smaller Companies

A change in the approach to investigations by the U.S. Securities Exchange Commission (SEC) means smaller companies will continue to be in the agency’s crosshairs. Due to limited resources the SEC is opting to pursue smaller, easier-to-win cases. As a result, public companies should be advised to plan for $5 million to $7 million in defense cost when considering limits. To illustrate, a major carrier estimates a third of all securities class actions involving companies of less than $1 billion in revenue have a related SEC case. The related securities cases alone could cost between $2 million and $5 million to defend.

5. Administrative Law Judge

In the last year, the SEC is filing more cases through the Administrative Law Judge process. The ability for clients to defend themselves in this proceeding is more limited than in the federal court setting. The fact that it is cheaper and faster for the SEC to bring cases through this process is one more reason your clients need help purchasing adequate defense limits for all cases.

6. Whistleblower Protection

The SEC has created whistleblower protections to make it easier for company insiders to report securities law violations for the SEC to ferret out cases in need of prosecution. Decisions by the U.S. Supreme Court in 2014 bolster whistleblower protections, and the Equal Employment Opportunity Commission reports that retaliation claims – including claims that whistleblowers were retaliated against – were the number one type of employment claim in 2014. To protect your clients from this event, review your client’s D&O policies to increase the potential for coverage for whistleblower claims. If there are gaps in coverage, it’s important these are addressed at renewal and before a claim is made. In addition, make certain that whistleblower issues are addressed in employment practices liability insurance policies to ensure both policies function together without gaps.

7. M&A-Related Lawsuits

Statistics show that public companies have a 94 percent chance of getting sued on large M&A transactions. As a result, carriers are attaching M&A-specific retentions and other restrictive language in policies. For example, a carrier sought to apply the higher M&A retention to a claim related to a stock sale for one of our clients. We were able to show the M&A retention applied only to ownership changes, preventing the carrier from applying the higher M&A retention.

8. Cyber Liability/Data Security

Cyber/data breaches are becoming a daily occurrence and could potentially bankrupt companies, both large and small. We have observed D&O carriers attempting to insert language into the D&O policy that would exclude any claim that references cyber or data issues. In one case, a client who was facing a D&O suit resulting from an unauthorized disclosure of personally identifiable nonpublic data of its customers would have suffered $500,000 in uncovered defense costs had we not been able to negotiate the removal of the cyber exclusion from the D&O policy.

9. Foreign Corrupt Practices Act

For many companies that do business overseas, private and public, it is virtually impossible not to violate the Foreign Corrupt Practices Act (FCPA) at some point. The per-violation penalties are severe, and can include jail sentences for directors and officers. Companies need to ensure terms and conditions with the greatest breadth of coverage for FCPA investigations. Some insurance policies may include coverage for fines and penalties for FCPA violations, but it is arguably against the law for carriers to pay the fine. Settlements with the SEC and Department of Justice (DOJ) generally include provisions prohibiting these fines from being paid by insurance. Look to negotiate coverage for civil fines and penalties pursuant to the most favorable venue.

10. Anti-Kickback Statute/False Claims Act/Antitrust Case

These cases are becoming more common. However, often times, anti-kickback or false claims act cases can get caught up in the fines and penalties exclusions or in the breach of contract exclusions common in private company D&O policies. Be wary of antitrust exclusions in private company D&O policies. In particular, if you have a government contract, carefully review the policy’s exclusions to avoid denials of claims.

Topics Lawsuits Cyber Carriers