In this chapter of our Annual Insurance Review 2021, we look at the main developments in 2020 and expected issues in 2021 for D&O.Key developments in 2020
For D&O insurers, 2020 was all about the hardening market – with rates doubling in some cases and limits contracting – and the underlying causes of that.
A combination of a rise in shareholder class actions, US securities claims, event based litigation, extremely large scale regulatory/criminal investigations, litigation funding and size of settlements all contributed to this hardening. The market had been under-priced for years and was set to correct itself, when COVID-19 shook the global economy.
COVID-19 class actions started to emerge in the US in a number of industries, including the travel, pharmaceutical, manufacturing, retail and technology sectors.
In the UK, high profile criminal investigations by the SFO against D&Os continued to dominate the press, as well as follow-on expensive shareholder actions under Section 90A FMSA 2000 (triggering side C coverage), such as that brought against Tesco Plc.
As we predicted last year, climate change litigation grew, with derivative shareholder actions against the oil and gas industry in the US in particular, posing a significant risk to D&O insurers. Notably, in November 2020, one of Australia's largest pension funds settled a high-profile climate change lawsuit. Whilst the settlement did not set a legal precedent, it will likely spur on other similar pieces of litigation around the world.
Against the backdrop of higher social awareness, class action diversity and MeToo claims were on the increase in 2020 – a trend that is set to continue and have an impact on D&O policies.
What to look out for in 2021
We believe the largest source of new claims in 2021 is likely to arise from poor financial performance and the raft of company insolvencies that inevitably lie ahead, occasioned by the COVID-19 pandemic and the related lockdowns, leading to shareholder derivative actions and, more commonly, claims by administrators or liquidators. According to the most recent Office for National Statistics survey, over a third of hospitality businesses are currently at moderate to severe risk of insolvency.
Management may also be exposed to risks related to the way they have dealt with furlough and redundancies and other lockdown related work issues.
Whilst the Corporate Insolvency and Governance Act 2020 temporarily suspended wrongful trading from March to September 2020, to allow company directors to ensure that their businesses could weather the COVID-19 storm, that relaxation was lifted briefly before being reintroduced, and the suspension may itself have had the unintended consequence of increasing creditor losses and the quantum of subsequent claims. Further, all other sources of liability under the Insolvency Act 1986 and Companies Act 2006 remained unaffected, including the summary remedy of misfeasance (under section 212) and claims for breach of fiduciary duty.
Separately, climate change and diversity litigation will, we believe, continue to gain momentum in 2021.
As D&O becomes increasingly challenging to write, Insurers will want to carefully consider the scope of coverage offered.
Download our full Annual Insurance Review 2021 for more insights.