Whether it be 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 D&O exposures. In this article USI lists current challenges D&Os face and how the USI One AdvantageTM – the company’s unique approach to solving business issues – helps directors and officers put their house in order.
- 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.
USI Management and Professional Services’ (MPS) consultants draft and design carrier-specific endorsement packages that provide broad grants of coverage and reduces exclusionary language. The endorsement packages combined with negotiated terms ensure the client is afforded expansive coverage.
- 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.
USI's proprietary OMNI engine, which enables us to obtain a complete risk profile of clients, is used in conjunction with analytics and benchmarking to provide optimal limits, pricing and retentions for insureds.
- 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.
USI assists clients to create D&O programs with broad coverage for investigations and maximize covered defense costs. In a recent case a CFO who was asked to appear for an interview and produce documents had $250,000 to $750,000 in expenses covered by the carrier because USI had negotiated broad pre-claim inquiry coverage during renewal negotiations.
- SEC Targeting Smaller Companies – A change in the SEC’s approach to investigations 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. USI consultants advise public company clients (less than $1 billion in revenues) to plan for $5-to-$7 million in defense cost when considering limits. A major USI carrier partner estimates a third of all securities class actions involving companies of this revenue size have a related SEC case. The securities class action alone could cost between $2-to -$5 million to defend.
- 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 USI is committed to helping clients purchase adequate defense limits for all cases.
- Whistleblower Protection – The SEC has created whistleblower protections to make it easier for company insiders to report securities law violations. This means more cases are coming to the SEC served on a platter. 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.
USI’s MPS consultants review D&O policies to increase the potential for coverage for whistleblower claims. If there are gaps in coverage, they work with the client to explore options to close the gap at renewal and before a claim is made. MPS consultants will also ensure that whistleblower issues are also addressed in the insured’s Employment Practices Liability Insurance policy to ensure both policies function together without gaps.
- M&A-Related Lawsuits – Public companies have a 94% chance of getting sued on M&A transactions. Whereas typically sellers were sued, buyers increasingly are becoming targets of these lawsuits. As a result carriers are attaching M&A-specific retentions and other restrictive language in policies.
USI recently worked with a carrier that sought to apply the higher M&A retention to a claim related to a stock sale. USI was able to show the M&A retention applied only to ownership changes, preventing the carrier from applying the $750,000-M&A retention.
- Cyber Liability/Data Security – Cyber/data breaches are becoming a daily occurrence and are potentially bankrupting to insureds.
USI MPS consultants 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 USI client in the Southeast that was facing a D&O suit resulting from an unauthorized disclosure of personally identifiable nonpublic information of its customers would have suffered $500,000 in uncovered defense costs had USI not been able to negotiate the removal of the cyber exclusion from the D&O policy.
- Foreign Corrupt Practices Act – For many companies that do business overseas, private and public, it is virtually impossible not to violate the FCPA at some point. The per-violation penalties are severe, and can include jail sentences for D&Os.
USI’s MPS consultants work with clients 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 DOJ generally include provisions prohibiting these fines from being paid by insurance. USI negotiates coverage for civil fines and penalties pursuant to the most favorable venue.
- 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.
USI advises insureds to be weary of antitrust exclusions in private company D&O policies. In particular USI consultants work with insureds that have government contracts to carefully review the policy’s exclusions to avoid denials of claims.
For more information on D&O coverage, contact Mike Mooney at 610.537.1441.