ESG: Directors and officers liability coverage considerations

This is the second report in our series exploring how environmental, social, and governance (ESG) risks can be mitigated by insurance coverage.

We consider the risks posed by environmental issues, the transition to a more sustainable economy and society, social and governance, and how this impacts management liability insurance generally and directors and officers (D&O) insurance in particular.

ESG cover considerations for D&O liability insurance outlined in this report include:

Regulatory investigations and fines

The risk of regulatory action arising from ESG-related issues is a key concern for directors.
Where a regulator, such as the Financial Conduct Authority, Health and Safety Executive, or the Competition and Markets Authority, investigates a director or officer in relation to a breach of regulations, the D&O policy should respond, subject to its terms and conditions.
Notably, fines and penalties are not usually recoverable where they have been levied due to a criminal or “morally reprehensible” act by the insured person. The policy, however, will generally cover defence costs until such conduct has been finally established by legal process.
Government oversight and regulation will put pressure on boards to ensure that their businesses are complying with environmental legislation.
The Task Force on Climate-related Financial Disclosures (TCFD) has developed a set of recommendations that are changing the way organisations manage climate risks and opportunities. A number of countries, including the UK, have taken steps to encourage or enforce TCFD implementation and reporting.
In the US, the Securities Exchange Commission (SEC) made proposals for broader disclosure obligations in March 2022; these include the requirement for greater attention to reporting on climate- and emission-related exposures, including on Scope 3 aspects like companies’ supply chains and customer bases.

Activists and investor action

In addition to domestic laws and regulations, companies are facing increasing litigation risk from environmental groups and activist investors.
With environmental accountability being a cornerstone of corporate responsibility, it is likely that we will see an increase in claims relating to compliance with international agreements, such as the Paris Climate Accords, driven by activist action — particularly in the US.
Failure by a board of directors to consider and mitigate the impact of climate change on their business, and to take advantage of the opportunities it might create, could also lead to claims that they are breaching their duty of care to the company.
Depending on the policy wording, cover may be available under D&O Side A or B for the costs associated with such activist action in the form of crisis response cover.

Employee claims

Employees who feel that they have been discriminated against or constructively dismissed — particularly during the COVID pandemic — may pursue individuals in senior management, as well as the entity, for losses suffered.
Where directors and officers have not taken action to stamp out such discrimination, arguably perpetuating a culture where such behaviour is tolerated, or can be shown to have participated in it themselves, they may find themselves exposed to litigation.
Regulators are also increasingly interested in the action companies are taking to diversify their leadership.
Directors and officers should consider whether cover for employment practices violations are included in their D&O cover, and if so whether they will be covered for allegations of wrongdoing related to employment issues, including social and diversity and inclusion issues.

Greenwashing

Activist investors are increasingly pursuing listed companies for allegedly misrepresenting their climate credentials or failing to take action in accordance with their stated climate goals.
Companies and boards found to be making false representations about the “eco” status of their products could face both regulatory action and litigation, which could result in long-term reputational damage.
Shareholders who have lost money following revelations of greenwashing could bring claims against the company and its directors and officers, which could fall under Side C in the case of the company and Sides A or B in the case of directors.

Derivative actions

There is a risk that directors who do not consider and take action on environmental and societal issues — and how their company’s operations impact these issues — could be exposed to claims of breach of duty.
Breach of this duty exposes them to allegations of wrongdoing and the risk of derivative actions brought by shareholders on behalf of companies.

Governance

The significant risks from litigation, regulation, and activism mean that boards of directors should be considering how best to oversee their company’s ESG agenda and its progress.

Supply chain

Companies keen to evidence their ESG credentials to insurers must look not only to their own activities but also to those of their supply chain, stakeholders, and subsidiaries.
The supply chain, and the often-labyrinth web of subsidiaries and their suppliers in a large international company, is very difficult to oversee, but can nonetheless leave companies exposed to allegations of a failure of oversight and good governance by the board of directors.

Download the report to find out more.

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