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June 20, 2023

D&O Insurance Trends

If you need D&O coverage, you should be aware of the things happening in the D&O sector. According to the D&O Diary by Kevin M. LaCroix, it’s been an eventful time for D&O coverage, with noteworthy developments in litigation and ESG investing. Let’s take a look at what’s happening in D&O insurance trends.

The Environmental, Social, and Governance Impact

The current focus on environmental, social, and governance (ESG) investing could increase pressure on companies that don’t meet expectations, potentially even leading to lawsuits.

According to AP News, ESG investing has received criticism for being politicized. However, this hasn’t prevented its huge popularity. Investors who use ESG criteria controlled $8.4 trillion in U.S.-domiciled assets in 2022. ESG investors are encouraging companies to pay attention to ESG factors and to keep them in mind when voting at annual shareholder meetings.

Activists are opposing companies accused of not doing enough to promote ESG. According News NCR, insurers say D&O prices could increase if activities are successful in some large cases.

However, the D&O Diary notes that ESG-based litigation has been targeting companies that are proactive on ESG issues, rather than targeting ESG laggards. In other words, when companies announce ESG goals and then fall short, litigation can follow.

The “social” aspect of ESG can overlap with diversity, equity, and inclusion (DEI) efforts. Bloomberg Law says DEI lawsuits have increased since 2020 and nearly 40 lawsuits have alleged misleading statements about DEI commitments. Many companies made statements and established new policies after the death of George Floyd – numerous lawsuits from investors and employees have cited these policies.

Security Class Action Lawsuits and SPAC-Related Litigation

Since the level of litigation can impact D&O rates and availability, trends in class action lawsuits and SPAC-related litigation are worth noting.

According to the Securities Class Action Filings 2022 Year in Review from Cornerstone Research, the overall volume for class action securities filings in federal and state courts declined slightly in 2022. In 2021, there were 218 filings; in 2022, there were 208.

However, the number of core filings (i.e., filings excluding M&A filings) increased slightly. Furthermore, the total Maximum Dollar Loss and Disclosure Dollar Loss amounts rose significantly. Mega filings played a role in this: the number of mega Disclosure Dollar Loss filings was more than double the historical average, and the total Disclosure Dollar Loss amount from mega filings was more than four times the historical average. Additionally, the Maximum Dollar Loss amount from mega filings increased by 200% compared to 2021.

SPAC-related filings decreased by 27% in 2022. This decrease corresponds with a drop in SPAC IPOs in 2022. In 2021, there were 34 federal SPAC filings. In 2022, this figure dropped to 25. Notably, filings decreased over the course of the year – there were only six filings in the second half of 2022.

According to the D&O Diary, mergers often trigger SPAC-related litigation. With many SPACs anticipating mergers, more litigation may be ahead. However, with the SPAC IPO marketplace cooling, many planned SPAC mergers have been called off.

COVID-Related Litigation

The COVID-19 Public Health Emergency is set to end on May 11, 2023. However, the pandemic’s impact on the D&O sector remains.

According to Cornerstone Research, COVID-related filings reached a new high in 2022 with 20 filings. In both 2020 and 2021, there were 17 filings.

The nature of COVID-related filings continues to evolve. According to the D&O Diary, early lawsuits typically involved litigation against companies that experienced outbreaks, were expected to prosper due to the pandemic, or experienced worsened operations or financial performance due to the pandemic. Now, we’re seeing lawsuits against companies that did well in the early days of the pandemic but have not fared as well since. One example of this is a lawsuit against Amazon.

What to Expect in the D&O Market

According to the D&O Diary, D&O insurance experienced a hard market between 2018 and the end of 2021. During this time, premiums increased sharply and some companies experienced difficulty in finding coverage.

As of early 2023, Business Insurance says policyholders have continued to see rate decreases and capacity increases, especially for excess layers coverage. However, individual accounts may still face challenges, depending on their exposures and loss history.

Heffernan Insurance Brokers can help you secure coverage that helps you take control of your risks, including D&O insurance. Learn more.

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