A increased federal regulation, including interest in environmental, social and governance issues, could complicate the market for directors’ and officers’ liability insurance.
Among the latest legislative developments, a Securities and Exchange Commission clawback rule adopted in October requires, in cases where stock issuers are required to make an accounting restatement, the clawback of improperly awarded incentive compensation paid to current or former executive officers for the preceding three-year period.
In August, the SEC adopted “pay-for-performance” criteria, which require registrants to disclose information detailing the relationship between executive compensation and the registrant̵7;s financial performance.
An SEC rule on climate-related disclosure issues is also expected.
In September, the Justice Department updated an October 2021 memo and announced new guidelines for prosecutors to use when assessing corporate crime, stating that its first priority in corporate crime matters is holding individuals accountable.
In a January 17 speech, Assistant Attorney General Kenneth A. Polite, Jr. announced revisions to its enforcement policy, stating that they “provide specific, additional incentives for voluntary self-disclosure as well as for cooperation and remediation.”
Matthew McLellan, Washington-based managing director and D&O product manager for Marsh LLC, said federal regulatory activity is “an area that insurers are quite concerned about.”
“When you have big government investigations, it really provides a roadmap for the plaintiffs’ bar” that’s even better for them than a short-seller report, he said.
ESG, in particular, is a concern, experts say.
ESG will continue “to really demand a lot of attention,” with insurers looking more deeply at what companies are doing in this area, said Scott Seaman, a partner with Hinshaw & Culbertson LLP in Chicago.
Matthew Azzara, New York-based head of management liability for North America at Allianz Global Corporate & Specialty, said ESG compliance requirements and the potential for regulatory and legal action “could greatly impact” D&O policies.
He said it is important that policyholders neither understate nor overstate their ESG disclosures. Companies with “robust and realistic frameworks” are likely to find it easier to obtain insurance, he said.
Insurers are bringing up ESG in discussions, “but they’re not asking very specific questions,” said Larry Fine, New York-based head of liability coverage for Willis Towers Watson PLC.
“They tend to have one or two questions about climate, and sometimes one or two questions about diversity in discussions,” he said, adding that ESG does not appear to be a direct factor in determining pricing.
Ernest Martin Jr., a partner with Haynes & Boone LLP in Dallas, said insurers will question how vocal companies are on some “hot-button” ESG issues.
“I wouldn’t be surprised if down the road you start to see some exceptions that may apply” in this area, he said.
One of the challenges with underwriting ESG-related risks is that it’s an amorphous term that encompasses a wide range of risks, experts say.
“It’s this big, broad topic” and there’s a belief that it can be quantified and measured and used in underwriting, which is “optimistic at best,” Kevin LaCroix, vice president in Beachwood, Ohio, told RT ProExec , a division of RT Specialty LLC.
Meanwhile, experts predict the SEC’s anticipated climate disclosure rule could lead to more securities litigation and higher D&O rates.
One of the ironies of the situation is that companies that make forecasts may be more likely to be hit with lawsuits for not keeping promises than companies that do not set any climate-related goals, observers say.
“The more disclosures, the more they open themselves up to scrutiny, but those who do wrong and don’t talk about it is still a cause for concern,” said Patrick Whalen, a New York-based executive risk underwriter at Beazley PLC. team.
A related issue is the potential for litigation arising from so-called anti-ESG legislation. These laws, mostly passed in conservative states, generally restrict government entities from doing business with financial institutions that won’t invest in companies associated with fossil fuels or firearms, for example.
In December, Florida Chief Financial Officer Jimmy Patronis announced that the state would divest its investments from BlackRock’s management because of its pro-ESG stance.
In January, Texas Attorney General Ken Paxton said he had made a decision that “has the effect” of Texas halting Citigroup CN’s ability to underwrite most municipal bond offerings in the state because it had discriminated against the firearms sector. Citigroup has denied the allegation.
William G. Passannante, a shareholder at Anderson Kill PC in New York, said the anti-ESG issue could lead to litigation
Experts say another area of concern is the SEC’s whistleblower awards.
Mr. Fine said the SEC “is more active every year” in awarding record amounts — an indication that the agency “has stepped up its game a little bit.”
The agency awarded more than $5 million to a whistleblower in January, which followed an award of more than $20 million in December, a $20 million award in November and an award of more than $10 million in October.