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FINEX Observer: Looking ahead to directors and officers (D&O) liability in 2021

Financial, Executive and Professional Risks (FINEX)

December 15, 2020

For weary D&O insurance buyers: 2021 likely better than 2020, but still expected to start off hard.

For D&O liability, 2020 proved much harder than expected—even before COVID-19 began to upset everything. We entered 2020 in a hard D&O market. Then, COVID-19 made things much worse. To set a baseline for 2021, we recap our top five 2020 challenges—any one of which could be a source of a new wave of D&O claims.

  1. Pandemic: No 2020 D&O challenge compares to the impact of the pandemic itself. COVID-19 went from an isolated disease in a region of China to a global pandemic in under three months. On March 23rd, the S&P500 ended down 34% from its February 19 all-time high--trillions of dollars in market value lost from the U.S. It was the fastest 30% bear market from all-time highs in stock market history. COVID-19 was (and is) still spreading. Offices closed. Cities closed, reopened and closed again. Travel stopped. Revenues were decimated for some. Concerns: Liquidity? Uncertainty? Safety? Working remotely and recalibrating to the new environment? Are we covered? Travel, leisure, airlines, hospitality, oil & gas, gaming and auto parts & equipment industries were hit the hardest. For more, see “Client Alert: D&O risk and Coronavirus - Proactive considerations” and “COVID-19 and executive risk: how can D&O coverage help in this pandemic?
  2. Holding companies more accountable — A cultural and social evolution: Events in 2020 elevated key issues beyond profits. Many are asking corporations to do more for more stakeholders. Expectations of companies and their leaders are changing. Environmental, Social and Governance investing continues to trend higher. Investors were not the only ones looking at ESG. Regulators were, too. For more, see “Green” Sweep? The SEC turns its attention to Environmental, Social and Governance (ESG) and Asset Managers and Regulatory scrutiny of ESG investment: Are plan sponsors in the crosshairs?). Outrage over the tragic death of George Floyd and other similar incidents sparked heightened focus on systemic racism and injustice in the business world. 2020 saw the rise of a new segment of D&O litigation--shareholder derivative suits filed against the board of directors based on the alleged lack of racial diversity on the company’s board and/or the failure to keep diversity and inclusion promises. How big is the problem (or the solution)? One Internet company settled sexual harassment claims with a $310 million commitment detailed in a 177-page settlement devoted to new diversity, equality and inclusion measures and enforcing policies better. Diversity Mandate in California--a new law requires that by specified deadlines public companies with “principal executive offices” in California must have a director or directors from an “underrepresented community.”
  3. Feeling the pressure: Even before COVID-19, we were seeing signs of economic pressure. COVID-19 piled on with some industries hit much harder than others. For example, on April 20, West Texas Intermediate futures for May delivery, which expired the next day, plunged more than 100% to -$37.63 a barrel. (Yes, you read that right. Negative $37.63 a barrel!) This highlighted the ongoing challenge for oil & gas of oversupply heightened by a falloff in demand as a result of the pandemic. For more, see 5 Critical D&O Insurance Action Items for the Oil Industry. So, it was not surprising to see commercial Chapter 11 bankruptcies were up 33% for Qs 1-3, and up 44% YoY for Qs 2 - 3. Nevertheless, with many of those cases consensually resolved, we did not see the wave of bankruptcy fueled D&O losses that some expected. For more, see Evolving directors’ and officers’ risk for distressed organizations: Part I.
  4. Derivative claim concerns - Mission critical oversight failures and mega settlements: Last year’s Delaware Supreme Court decision in Marchand v. Barnhill opened the door to derivative claims based on critical failures of board oversight. This year the plaintiffs’ bar began to take advantage of their new opportunity by successfully pleading other oversight claims. The plaintiffs’ bar has already begun to push this new opportunity to its limits—testing the condition that oversight failures must be “mission critical.” This new trend may add to ongoing concerns over an expected wave of “mega” ($100 million or more) derivative suit settlements and increasing derivative claim frequency. With derivative claims a key driver of non-indemnifiable (Side-A) loss, carriers have flagged the oversight claims and mega settlements in support of their efforts to push Side-A rate and terms.
  5. Political and judicial decisions: It was a tough, election year with COVID-19 effectively re-defining how many of us voted, an unexpectedly close, photo-finish in the presidential race that some continue to dispute and that left us with the balance of power in the Senate still up for grabs. Thankfully, the Delaware Supreme Court helped mitigate risks form state court Section 11 claims when it upheld Federal Forum Provisions (FFP) as facially valid in Salzberg v. Sciabacucchi (a/k/a "Blue Apron"). For more, see Is Blue Apron a cure for the Cyan blues?), and California begrudgingly upheld an FFP too. (Wong v. Restoration Robotics). In June, the U.S. Supreme Court affirmed the SEC’s powers to obtain disgorgement as a remedy in enforcement proceedings. The U.S. Department of Labor has also waded into the discussion of Environmental, Social and Governance (ESG) investing as it pertains to employer benefit plans, giving rise to potential fiduciary liability and D&O risk concerns. For more, see Client alert: Supreme Court upholds SEC’s power to obtain disgorgement, with limits.

What to expect for 2021?

The pandemic, the social unrest and the elections put unprecedented attention on people and how we live and work together or don’t. These events served as catalysts for an already growing, compelling cultural shift away from pure capitalism to stakeholder capitalism and accountability. Advocates for socially responsible businesses made unprecedented progress in 2020. This movement is broad, and it encompasses B Lab’s B Corporations, the benefit corporation status recognized in 35 states, Washington, DC and Puerto Rico and Environmental, Social and Governance (ESG) investing. For 2021, expect more. Inclusion and diversity will be on the agenda, and it will take more than lip service or token gestures to pass the inevitable scrutiny that is coming. 

Our elections were much closer than expected and a critical aspect of the balance of power, who controls the Senate will ultimately be decided in 2021 by the Georgia runoff election. The Senate could be split 50-50 among both parties. That would put Vice President-elect Kamala Harris in a position to cast tie-breaking votes. If the Democrats take the Senate (or it is evenly split), for the next two years, we could see fundamental change in our laws concerning accountability, fiduciaries, the environment, employment, privacy, pay, worker treatment, diversity, antitrust and healthcare. Big business and Wall Street may again become the center of a movement for change, and the process and outcome could heighten D&O risks due to increased uncertainty, volatility or legislated standards/liability.

With or without Democratic control of the Senate, we can expect a very different D&O environment. While the new administration may not get all the pieces in place on day one, over the course of 2021, we should see a host of initiatives starting with a series of executive orders and appointments that will quickly have an impact on our financial, regulatory and enforcement environments. Expect more accountability—especially for larger companies, Wall Street and their leaders.

  • We can expect that no matter who is appointed to the Securities and Exchange Commission (SEC), it will change its emphasis and targets—although it could be 2022 before we see a refreshed SEC operating at full speed. Nevertheless, recent SEC initiatives, like the November 2, 2020, revisions to the private placement regime under the Securities Act of 1933 are likely to impact how companies choose to raise capital in 2021—expect more private placements and crowd funding due to the elevated maximum offering thresholds. A Biden SEC may standardize ESG disclosures, reform proxy-voting rules and tweak Regulation Best Interest.
  • For public companies, we estimate that, absent a last-minute spike, 2020 is likely to close with around 350 securities class action filings—down about 17% from the 420/year prior 3 year average. For 2021, we can expect SCA filing volume to head back up to pre-COVID-19 filing rates as companies will be less able to assert as a defense that the surprising pandemic impact caused company-specific performance misses. Also, by or before 2022, a more aggressive SEC could mean more investigations, fines and disgorgement risks and stronger SCA claims as the SEC’s work is leveraged by the plaintiffs bar.
  • Our active IPOs marketplace will likely continue as long as Washington supports extending critical lifelines and our markets remain attractive. With activity, we should continue to see IPO-based claims even though more of those claims will be brought in Federal courts. Also, even with fewer state court IPO claims, expect a continuing hard market for pre-IPO D&O liability insurance.
  • Derivative claims are likely to continue to trend upward in both frequency and severity as Caremark-based claims and racial diversity suits expand opportunities for lawyer-driven litigation while mega-derivative settlements heighten carrier severity concerns. These trends are likely to impact Side-A D&O insurance markets the hardest.

While recent encouraging vaccine news gives us hope for a return to normal, we should expect our pandemic cloud will linger with us deep into 2021. Companies may face ongoing or periodic shutdowns and demand falloffs may fuel financial/liquidity challenges. As the pandemic drags on, we are likely to see restructurings continue at an escalated rate. The longer the pandemic cloud lingers, the greater the likelihood of repeat restructurings (euphemistically referred to as “CH 22s” or “CH 33s”). For those filings, pre-packed and pre-agreed restructurings may be much harder to pull together. So, the incidence of material D&O claims per bankruptcy may rise.

Beyond the pandemic and traditional D&O claims, we should monitor the impact of developing exposures like privacy, AI, the social dilemma, cyber insecurity, the rise of the fractional share trader (for more, see the PLUS Blog: The Robinhood Effect) driverless cars/trucks, big tech, Brexit, the gig economy (and counter-gig forces), shifts in trade, healthcare, and tax policy and, of course, climate change and related disclosures. 2021 could bring a fix to the complexity of inconsistent state and federal regulation of Cannabis—which could help stabilize associated D&O risks. Will we see globalism resurface and nationalism retreat? If so, tax policy, the regulation of privacy, and antitrust, money laundering and anti-bribery enforcement could become bigger D&O risks, too. Big Tech is in focus. Too powerful? Has the world's biggest search engine been used to the detriment of consumers, rivals, and others?

So, why will 2021 likely be better than 2020?

  • With the shock of the pandemic behind us, we are now better positioned to respond to the challenges ahead.
  • With our election year soon to be behind us, and with the closer-than-expected votes demonstrating that neither party has a clear mandate, we have some basis for hope for more cross-party collaboration and critical progress—but that outcome is far from certain.
  • We learned how to succeed when working remotely, and many businesses have effectively recalibrated to our more virtual world.

In 2021, our D&O insurance market is likely to be in a better place with capacity contraction tapering off and excess recalibration nearly done. While rate is expected to continue to rise, the rate of increase is expected to fall as we have likely reached the point where policyholders are unwilling to pay much more for their D&O and willing capacity (supply) begins to align better with demand. Lastly, for 2021, we have new capacity coming online. While the new capacity may not end the hard market overnight, it may be enough to light the fires of competition.


This Willis Towers Watson publication is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. If you would like additional information, please contact us. Some of the information in this publication may be compiled by third party sources, whilst we consider these to be reliable, we do not guarantee and are not responsible for the accuracy of such. The views expressed herein are not necessarily those of Willis Towers Watson. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates, for example: Willis Towers Watson Northeast, Inc. in the United States, Willis Canada Inc., in Canada.

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Rob Yellen
Executive Vice President, D&O and Fiduciary Liability Product Leader, FINEX

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