Introduction
Ongoing political and economic disruption within the UK and globally means that board members face an extremely challenging environment. The COVID-19 pandemic has given way to further instability and uncertainty, while the exposure of multiple business scandals and corporate collapses has led to escalating scrutiny on directors and officers.
In this article, we examine the current key risk trends that directors and officers should be aware of and how director and officer insurance ("D&O insurance") can help to mitigate these risks.
Key risk trends
A challenging financial outlook
Tough financial conditions pose particular risks for directors and officers, and the current economic climate poses more challenges than ever.
The increased cost of borrowing, high inflation and energy costs and volatile supply chains continue to put pressure on many UK companies. Whilst there are signs for cautious optimism, with a stronger than expected increase in UK GDP in May 2024, boards are only too aware that there is no room for complacency. Indeed, in such circumstances, directors and officers may be more willing to make risky and impulsive decisions, leading to loss and potential claims, whether by disappointed shareholders or creditors.
Ongoing financial challenges also explain statistics from The Insolvency Service which indicate that, as at May 2024, the number of company insolvencies in England and Wales was higher than during either the COVID-19 pandemic or between 2014 and 2019. The Body Shop is just one of the more high-profile victims.
Directors and officers must be particularly cautious where insolvency looms. From the risk of wrongful trading, to breach of duty or failure to have regard to the interests of creditors as well as shareholders, directors and officers are likely to find their actions under greater scrutiny than ever, with the commensurate risk of claims.
Ongoing conflicts and political uncertainty
Escalating geopolitical tensions, including ongoing conflict in Gaza and the Russian invasion of Ukraine, have contributed to these financial pressures, as well as leading to a more challenging political risk landscape and greater risks for directors and officers.
Decisions on whether to withdraw from or continue to operate in or near war zones are fraught with difficulty, requiring careful consideration of the interests of both shareholders and employees, as well as reputational risks to the company. Directors and officers must also engage with increasingly complex finance and trade sanctions, with a failure to ensure strict compliance potentially resulting in significant criminal liabilities.
Meanwhile, around half the global population has or will head to the polls in 2024. That political instability means directors and officers need to understand what regime change may mean for their companies and strategise accordingly.
ESG obligations
Environmental, social and governance (ESG) issues continue to dominate corporate decision-making. Greater regulatory controls and increasing shareholder activism are leading to an increased risk of claims targeting directors and officers in circumstances where companies have failed to deliver on their ESG targets.
While ClientEarth's recent attempts to claim against Shell's directors for an alleged failure to adopt and implement a climate strategy that aligned with the Paris Agreement ultimately proved unsuccessful, the proceedings are an important warning of the liabilities directors and officers now face. Indeed, more recently Boohoo's investors have brought a £100 million claim against the company after its value dropped by more than £1 billion following modern slavery allegations in 2020.
Cyber security liabilities and AI
In recent years cybersecurity concerns have developed into an existential threat to companies, with potentially devastating financial implications. For example, a cyber-attack against Virgin Media in 2020 which caused a data breach of approximately 900,000 customers' personal details has left the company facing a class action reportedly valued at approximately £4 billion.
UK carpet brand Carpetright recently filed a notice of intent to appoint administrators, citing a software attack which affected its plans to restructure its business. Such cases leave directors who have failed to implement adequate cyber security and data protection controls, and those who fail to respond appropriately to a cyber incident, at potential risk of liability for breach of duty.
Meanwhile, a rising number of companies are adopting some form of artificial intelligence (AI) into their businesses, whether to assist with administrative functions or in relation to more creative endeavours. Companies that fail to engage with AI will no doubt struggle to compete however, there are also clear risks in embracing new technologies without appropriate controls in place.
What is D&O Insurance?
D&O insurance is designed to cover claims made against a company's directors or officers arising out of their actual or alleged wrongful acts, including:
- breach of fiduciary duties;
- claims by shareholders for losses incurred by the company as a result of a director or officers' negligence, default, breach of duty or breach of trust;
- reporting errors in documents such as a director's report, financial statements or accounting records;
- inaccurate or inadequate disclosure in breach of reporting duties;
- misrepresentation;
- failure to comply with regulations;
- corporate manslaughter; and
- creditor claims.
A D&O policy is intended to cover legitimate risks that could reasonably be expected to arise when acting as a director or officer. It will therefore typically exclude cover for fraud, intentional criminal acts, illegal remuneration or personal profit and fines and penalties that are uninsurable by law. If an admission is made or a formal ruling determines that a director or officer committed such an act, then insurers will usually decline further cover and may attempt to recover some or all of the costs already paid out.
Conclusion
D&O insurance cannot, of course, prevent claims from being made. However, it does minimise the risk of serious financial loss if a director or officer is subject to expensive and damaging litigation. Therefore, it is essential to have appropriate D&O insurance cover in place.
Directors and officers should regularly review their coverage to ensure that the policy is adequate, particularly in today's changeable climate. Although standard policies protect against a wide range of risks, they have their limits. Coverage extensions can be used to add tailored protections to a policy and may be advisable depending on a company and its director's and officer's individual requirements.