Growing need for D&O coverage

"In times of economic uncertainty, the risk and therefore the liability of directors and officers are significantly higher, making robust D&O coverage not just a necessity, but a strategic imperative" pointed out Pawel Piwowarski, Polish Financial Lines Director and FL Practice Leader.

Let’s look at a few examples for critical situations.

Increased risk of litigation

Economic instability often leads to heightened tensions among shareholders, regulators, employees, and other stakeholders. In such times, shareholders may be more inclined to file lawsuits against directors and officers, holding them accountable for perceived poor performance or risky decision-making.

• Class-action lawsuits: Volatile markets can lead to fluctuating stock prices, prompting shareholders to claim that managers failed in their duty to protect the company’s financial interests.
• Securities fraud claims: Companies in financial distress may face accusations of failing to disclose material risks or misrepresenting their financial condition in a prospectus or disclosure document.
• Social engineering: Proper coverage can help directors mitigate liabilities arising from social engineering tactics, highlighting the need for strong cybersecurity practices in corporate governance.

Financial mismanagement risks

During economic uncertainty, directors and officers often face tough decisions regarding cost-cutting, restructuring, or strategic shifts, such as: credit risk and bankruptcy claims which can consequently lead to increased credit risk and even the risk of insolvency.

Regulatory and compliance challenges

Directors and officers must navigate complex and evolving regulations related to accounting practices, reporting, and governance. Non-compliance can lead to legal action or regulatory penalties, for example related to ESG issues.

Mergers, acquisitions, and restructuring

Companies are often driven to explore mergers, acquisitions, or restructuring. These complex transactions come with significant risks, including shareholder dissatisfaction and disputes over transaction fairness, increasing the potential for D&O claims.

Reputation risks and public perception

Poor decisions or inadequate crisis management can destroy a company’s reputation, leading to lawsuits from shareholders. Directors and officers may face claims of neglect or misjudgement, further elevating the need for D&O insurance coverage.

Increased media attention

Negative publicity, whether from stock performance, leadership decisions, or failed strategies, can intensify pressure on directors and officers, exposing them to reputational and legal risks.