More Director Accountability Likely Means Higher Levels Of D&O Insurance

Boards are increasingly being held responsible for climate change related natural disasters, fraud and corruption allegations, and various other ESG-related lawsuits.

As corporate boards continue to assess the outlook for 2021, a reexamination of the coverages in their directors and officers insurance may be in order. Recent news reports suggest that corporate board liability is becoming a growing issue of concern with shareholders and boards may need to broaden their thinking on what they may be held accountable for in the future.

More and more, corporate boards are expected to react quickly or even act preemptively to mitigate any financial damage resulting from climate change related natural disasters, fraud and corruption allegations and various other ESG-related lawsuits. The level of accountability to shareholders and regulators continues to increase. Here are just a few examples of plaintiffs looking to hold board members responsible for actions that took place on their watch:

• Former Pacific Gas & Electric executives and board members are being sued for dereliction of duty for allegedly allowing the utility’s equipment to become so faulty that it was cited as the cause of wildfires that killed more than 100 people and destroyed more than 25,000 homes and businesses in Northern California in 2017 and 2018. The lawsuit, which has been filed on behalf of 80,000 fire victims, is seeking part of the $200 million to $400 million in liability insurance the former executives and board members had secured from the tragedy.

• Directors of Chemour’s Co., a spin-off from DuPont de Nemours Inc., are facing a lawsuit that accuses them of misleading shareholders about the financial health of the company as the spin-off was occurring.  The lawsuit charges that directors committed fraud when they failed to tell investors that the company was liable for more than $2.5 billion in environmental harm and health risks from chemicals known as PFAS, which left the company insolvent from the start.

• Last year, Oracle and other large tech companies were hit with derivative lawsuits alleging that they misled investors and the SEC when their company filings made generous claims about the companies being truly committed to diversity. The lawsuits ask for the resignation of some board members to make room for more diverse directors, more transparency about diversity hiring, promotion and pay equity, and a published plan to improve diversity at each company.

First, a review of current coverages will give the board an idea of how well-protected the company is regarding its D&O insurance needs. The board may find that more financial resources will be needed to improve the insurance coverages to account for the expansion of issues that directors are likely to be held liable for. Directors are being held accountable for what they do as well as what they fail to do.

Next, checking with shareholders about their top concerns would be wise. Many of these derivative lawsuits are being filed by shareholders who are pushing for change. Directors might want to find out if there are any Covid-related issues that shareholders want addressed that could turn into lawsuits in the future. Specifically, companies addressing workplace conditions for employees has been a flashpoint for many companies over the last year and might lead to lawsuits if not handled properly. Is additional insurance needed?

Directors will also need to begin to anticipate issues that they may be called to account for this year and in the future. Securing D&O insurance to cover management not adhering to its claims of diversity in its SEC filings was probably not a consideration a year ago.  Companies need to consider it now.

But perhaps the most important lesson the last year has taught directors is that they will likely have their decision-making held to a much higher standard of accountability going forward. Paying for a much higher level of D&O insurance will likely be part of what is necessary to protect the business. Improving their ability to anticipate potential threats to the company and working to mitigate those threats will also help.