July 2024 Market Update – D&O Liability Insurance

The directors’ and officers’ insurance market has been through a state of flux over the past four years due to changes to statutory obligations, evolving technological advancements, ESG changes and cyber risks. The dramatic softening of the market seen in early 2023 has stabilised over the 2024 calendar year so far, but premiums have not reached the levels of 2018-19.

New underwriting agencies backed by Lloyds of London have emerged together with global insurers such as Everest and Markel that have recently established Australian offices. The increasing competition together with reduced claims activity has kept rates stable into the first half of 2024.

With the benefit of a more favourable market, there is a heightened emphasis on strategically placing programmes with the most advantageous insurers, prioritising security and stability, underwriter expertise and claims payment track record. Opportunity presents to restructure programmes, increase sublimits, remove unfavourable exclusions and broaden coverage. Insurers are showing keen interest on large privately held companies and listed companies outside the ASX200.

Solvency continues to be a major focus of insurers with more insolvencies expected. Insurers are paying particular attention to construction, manufacturing and retail.

The key issues for boards are:

Whilst AI technology can assist with efficiency, improve objectivity, enhance the accuracy of risk estimation, and encourage improved decision-making with predictive insights into future scenarios, it also carries risks, for example, if AI systems are not implemented correctly or rely on human input.

As a result, AI technology may ultimately end up producing incorrect widespread information and present ethical concerns with respect to data privacy and protection thus minimising overall corporate transparency. Consequently, shareholders may hold boards accountable for AI related failures, resulting in costly claims and D&O losses.

We recently reported on new guidelines published by the Australian Cyber Security Centre to assist business engage with AI here.

Proposed reform to the Privacy Act 1988 (Cth) is imminent with draft legislation expected in August 2024 following recommendations for reform made by the Attorney-General’s Department in 2023. Changes include:

To date there has been limited actions brought by the Office of the Australian Information Commission (OAIC) in relation to privacy breaches. It is expected that new measures will give the OAIC broader powers to impose fines and penalties and bring regulatory actions for breaches of the Act.

Cyber-attacks continue to rise for businesses of all sizes and in a varied range of sectors with a 388 per cent spike in Q1 2024 in Australia alone (according to cybersecurity company Surfshark) compared to the final quarter of 2023. It was reported that 1.8 million Australian’s account details have been leaked.

With ongoing ransomware threats, cybersecurity has become a global D&O concern as losses can arise from allegations that there has been failure to take the necessary steps at an enterprise level to protect individuals’ personal and financial information and implement sufficient controls to detect and ultimately prevent cyber-attacks.

Boards are increasingly expected to ensure there are sufficient levels of protection in place to prevent a cyber-attack occurring. Insurers are now expecting to see Business Continuity Plans and Disaster Recovery Plans to consider cyber incidents and to show regular consultation and testing of these plans on an annual basis.

There has been a decrease in litigation recently with respect to SCA claims.

Since coming into office in May 2022, the current government has wound back reforms that would have required litigation funders to obtain a Financial Services License. This change has not been made, meaning companies and directors can currently only be sued for breaching disclosure requirements when acting with “knowledge, recklessness or negligence.”

In early 2024, two further significant shareholder class action judgments were decided in favour of defendants. Ashurst reports that shareholders have failed to secure an award for damages in all four shareholder class actions that have gone to judgment in Australia.

Whilst there are indications that the tide may be turning, Side C action risk remains a significant factor for publicly traded companies in Australia and boards must turn their minds to exposures such as litigation and potentially large-scale D&O losses, especially considering upcoming developments in the data privacy and climate change landscape.

ASIC have revealed that for the nine-month period from 1 July 2023 to 31 March 2024, restructuring (878) and court liquidation appointments (1,593) increased by 294.6 per cent and 218.8 per cent respectively, when compared to the previous corresponding period and these numbers are higher than those recorded for the full year period ending 30 June 2023.

As record numbers of insolvencies drive increased action against board directors, insurers are attempting to reduce their exposure to losses by applying insolvency and financial mismanagement exclusions on D&O policies. When these exclusions are applied, boards can be left exposed to potential claims where there may be little or no insurance coverage to protect individual directors and officers which is a major concern. Insurers are also being more cautious in underwriting methodologies prior to removing the application of such exclusions. Broader cover is available for proposers with healthy balance sheets and regular cash flow.

It is likely that this tightening of underwriting will remain in the near future considering the current economic climate and high interest rate environment.

Increased ESG activism has impacted the D&O market with board members being held accountable for upholding companies’ commitments to environmental and social initiatives by shareholders, regulators and the public.

The new mandatory climate-related financial disclosure obligations serve to complement the financial reporting regime under Chapter 2M of the Corporations Act 2001 (Cth) (the Act). The disclosure obligations will impact large businesses and financial institutions from July 2024 with the intention to provide investors clarity of financial implications of the disclosing entity’s climate-related risk, mitigation plans, and how it proposes to improve the quality of ongoing climate-related financial disclosures. Sustainability reporting comprises the more general concern that underwriters have in respect of climate risk and directors’ liability. See our article here for more information.

Climate change has been one of the main focuses of ESG-related litigation as a result of the ongoing rise in natural disasters, deforestation and biodiversity degradation. Many claims have arisen in recent times alleging that board members have not fully disclosed the material risks of climate change or promoted eco-friendly operations. It is expected that the new sustainability reporting standards will further exacerbate climate change litigation and subsequent D&O losses for non-compliant companies with claims made against companies, and in some cases against directors and officers directly, seeking damages for non-disclosure and or misleading and deceptive conduct in reporting or marketing sustainability. The recent decision in ASIC vs Vanguard handed down by the Federal Court on 28 March 2024 marked ASICs first win in a greenwashing civil penalty action which found Vanguard contravened the law by making misleading claims about certain (ESG) exclusionary screens applied to investments in a fund.

Entities who have taken steps to ensure robust reporting will be looked upon favorably by insurers whereas those who have not taken any steps or who cannot comply with the new disclosure requirements may face onerous terms and express exclusions.

In summary, whilst overall market conditions are favorable and have improved with decelerated premiums and increased capacity, it is unlikely that prices will continue to decrease long term, especially considering the evolving ESG environment, increasing insolvencies, and changing regulatory landscape. Companies operating in the more challenging industries, who have poor loss history and are not implementing sufficient risk management processes will remain susceptible to premium increases and possible coverage difficulties.

For more in depth market updates by product class, profession and industry, please see our individual reports below: