As every business leader knows, planning and averting a crisis is a lot less expensive than mitigating a disastrous event that can ruin the reputation of a company and devastate the financial assets of a corporation. Global events and trends put pressure on Canadian companies when it comes to risk management. From localized wars half way across the planet, to natural disasters, pandemics and negative economic events, these all can impact companies including private, non-profit and public. The trickle down affect of claims against directors and officers is now seen in greater numbers with higher dollar value claims.

Reviewing the risks of director and officers

Insurance brokers key goal is to help clients recognize risk. Identify parameters to protect directors and officers:

• In what country is the primary policy held and will it cover local claims?
• What are the protocols of the business in terms of assisting a director should they be named in litigation?
• Acknowledge that one day the company is likely to encounter an existential threat. Is a continuous crisis-response plan in place in the event an officer is named in a claim?
• Will the company buy a policy for individual directors to protect their personal liabilities?
• Has the corporation done a recent in-depth review related to multinational trends, insurance coverages, liability, indemnification and protections in the last 3 years?
• Will the costs of litigation and legal fees be paid by the company or will the director have to pay costs and then seek reimbursement?

Any company with a board of directors should have an internal risk management structure in place with formal written policies, and measures in place to adequately address or prevent claims against directors and officers. Top of mind should be compliance related to bribes, sanctions, embargoes, price-fixing and fraud, tax haven registrations, and learn more about “classic” D&O exposures such as M&A, capital measures, conflicts of interest and IPOs. D&O coverage can be complex, so ensure key risks are covered.

Trends in D&O risk and premium increases

The worldwide D&O market continues to experience difficult and hard market conditions, particularly for dual or US traded companies​. But more and more D&O claims are filed against private and on-profit companies putting pressure on insurers to look at their book of business.

• All Insurers are looking to manage and limit deployment, increase their retentions, and materially increase premiums.
• For Insurers who remain, underwriting capacity has significantly changed in order to regain profitability and avoid portfolio failure​.
• Many insurers have eliminated D&O coverages (i.e. Allianz Canada, RSA, Several Lloyds Syndicates etc).
• Premium increases typically start at 40%+ for well performing/low risk industries​
• Difficult industry classes or financially challenged business are experiencing larger increase, up to 75-100% or greater.
• Overall, D&O claims have historically been a severity risk, but the trend is also swinging up on the frequency of claims.

Changes in the frequency and monetary compensation.

In 2019 there were approximately 5,800 companies listed on the US Exchange (NYSE/Nasdaq), 428 class actions were filed against companies listed on the two exchanges. This is the most core filings (excludes M&A) on record. The average settlement value in 2020 was $44 million, more than a 50% increase over the 2019 average of $28 million.

Core filings are securities suits seeking class damages and reflect cases that are often triggered by nothing more than a drop in stock price or can be driven by a securities act that provides investors with the ability to hold issuers, officers, underwriters, and others liable for damages caused by untrue statements or material omissions of fact within registration statements. In other words, the most mundane or unpredictable event can precipitate a claim.

Reasons behind D&O claims increases

Mashood Ali, EVP, PMU Specialty Underwriting Managers reports, “D&O Insurance is becoming increasingly difficult to obtain at competitive pricing. Cover is being scaled back due to reductions in capacity and changes in underwriting guidelines. Cyber threats, insolvency. insider trading and employee allegations for harassment claims are leading causes of suits being brought against companies which has significantly increased the number of claims being submitted in addition to rise in premiums across all sectors.”

Global pressures continued in 2020, 2021 and now with more world-wide unrest and economic inflation happening the risks are increasing and insurers are limiting what they will cover.

• Level of complexity – it is getting more expensive to defend and settle.
• New and emerging risks – increasing risk exposures for both public and private companies.
• Increased D&O claims – more and more industries are seeing increases in claims. Along with global trends in individual culpability.
• Increase in the number of class actions filed.
• Defense costs have more than doubled.
• Regulatory, activity and security – there is a global movement for compliance and accountability, making it easier to launch claims.
• There is a growing trend towards seeking punitive and personal legal action against officers for failure to follow regulations and standards.

Further, Chris Ball, CEO, PMU Specialty says, that “PMU-S was born out of the need for companies to be able to get proper protection for their D&O. A $5m policy is not going to cut it anymore should a company with high risk factors be faced with a lawsuit.”

Emerging risks – what is driving the increase in D&O claims?

1. Establishing, developing and emerging global risks

• Cyber, data and privacy risks – Cyber risks transcend geographical boundaries.
• Cryptocurrencies – Currently, the transfer, purchase and sale of cryptocurrencies is largely unregulated but the question of whether they should and how this could be done is a priority for many regulators.
• Sexual misconduct – #metoo
• Climate change – Mismanagement of climate risk or breach of fiduciary duties in not considering the financial risks associated with climate change.
• Disseminating false, misleading or incomplete information on climate risks.
• Environmental impact of the company.
• Use of technology and artificial intelligence.
• Failing to comply with legislative reporting requirements or disclosure liabilities.
• Failing to protect the coHuman slavery in the supply chain.

2. Increased shareholder activism

Shareholders are influencing corporate conduct and decisions in the form of buying corporate shares to control decisions, using social media and public announcements to propose action and threatening lawsuits over ignored concerns. Following in the footsteps of a robust shareholder activism in the US, the trend is on the rise globally. Investors are driving corporate behavior and defining culture.

3. Employee driven lawsuits

In private companies, the majority of lawsuits against directors and officers are related to employment matters. It is not uncommon to see settlements in the hundreds of thousands of dollars.

4. Growth in popularity of litigation funding

In recent years, litigation funding has provided the opportunity for representative plaintiffs and law firms to launch class action lawsuits that previously may not have been feasible. Although, Canada is not a litigious as the US, as of August 2020, Omni Bridgeway’s Canadian ( a third party funder) business has received over 560 applications for funding.

5. Increased regulatory activism

Politicization of the regulatory process and a global leaning towards individual accountability. Boards are being held accountable for their failure to recognize, manage and mitigate risks. And there international cooperation amongst international regulators to hold boards accountable.

6. Insuring multinational D&O liability

Canadian provinces Quebec, Saskatchewan, British Columbia and Manitoba – and almost every state in the USA and countries including Brazil, China, Mexico, Japan, either impose strict conditions on insurance companies operating within their borders or prohibit the purchase of insurance for local risks from insurers not licensed or authorized there. In such cases, the company can mitigate this compliance risk by purchasing local policies covering all three areas of D&O risk, in addition to a master parent policy.

Investors are driving corporate behavior and defining culture. Following in the footsteps of a robust shareholder activism in the US, the trend is on the rise globally. Shareholders are influencing corporate conduct and decisions in the form of buying corporate shares o influence decisions, privately approaching the board, using social media and public announcements to propose action and threatening lawsuits over ignored concerns.

7. The broadening of criminal exposures

Historical criminal exposures pertained to corporate fraud, breaches of securities laws, bribery and corruption and antitrust laws. But now there is more broadening of corporate criminal liability related to health, and safety and environmental failures. Coupled with the “failure to prevent” accountability.

Risks covered

The aim of D&O insurance is to provide financial protection for managers against the consequences of actual or alleged “wrongful acts”. PMU S has a suite of products to help fill the gaps where other mainstream policies fall short. There are different risks in different markets, but common risks include:

• Employment practices & HR issues
• Shareholder actions
• Reporting errors
• Inaccurate or inadequate disclosure (e.g. in company accounts)
• Misrepresentation in a prospectus (Prospectus liability [POSI])
• Decisions exceeding the authority granted to a company officer
• Failure to comply with regulations or laws
• Cyber risks
• Pension trust liability
• Employment practices liability
• Criminal defence cost insurance

What does Directors and Officers Insurance Cover?

D&O policies are typically structured with three available insuring clauses –
Side A, B & C

Side A Coverage: Directors & Officers/Insured Persons

Insurance protection for the Directors and Officers when indemnification is not available to the Directors and Officers of the company resulting in a personal liability risk – Its sole purpose is to protect the individual directors and their personal assets and is the final protection if the company is unable to indemnify the Directors & Officers itself.

Side B Coverage: Company Re-Imbursement

Insurance protection for the company when they indemnify a Director and / or Officer of the company, in the form of a reimbursement from the insurer. Side B is a form of balance sheet protection for the company and the transfer of the indemnity exposure that is agreed in the company’s deed of indemnity.

Side C Coverage: Entity Securities Liability

Insurance protection for the entity’s own liability, specific to securities laws. It is balance sheet protection in the event the company is also named in a securities claim.

Please note that many insurers are no longer offering side C coverage due to claims history over recent years in Canada.

Resources for Trends for Directors & Officers liability insurance

PMU Specialty D&O insurance
The Third Party Litigation Funding Law Review: Canada\ Hugh Meighen
Borden Ladner Gervais LLP 10 January 2021
AIG – Private Claims
Allianz: Directors and officers insurance insights 2020.
Chubb: Private Company Risk Survey: D&O Risks and Risk Management
Canadian Underwriter: Why the D&O market will probably get harder