Is diversity the next big D&O risk?

The big question for agents and brokers is whether a client’s D&O policy will respond should they face litigation over diversity practices.

Diversity and inclusion issues are firmly in the spotlight on the world stage.

Litigation against directors and officers over diversity was once a fairly uncommon occurrence. But that all changed in 2020 when a number of lawsuits were filed against several high profile companies including Facebook and The Gap, Inc., regarding the lack of diversity on their boards of directors, senior executive leadership teams and overall employee base.

At a time of heightened awareness of the many issues and obstacles that black people and ethnic minorities face every day, directors and officers are facing greater scrutiny of how their companies respond to the call for greater diversity and inclusion. Recent lawsuits against large, public companies suggest that the escalating chance of a company being sued over its diversity practices.

In each of the lawsuits, there is a recurring theme: The companies in question and their boards have been idle when it comes to taking action in increasing diversity and inclusion, despite having the policies in writing.

Words vs. deeds

Similar to environmental issues, inaction by a company’s governing figures has been, and will likely be, a common complaint and cause for litigation. Inaction in this sense can mean a company’s failure to step back and reflect on its current approach to diversity (or lack thereof). It can also mean that a company fails to implement changes and enhancements to the diversity policies and procedures that it has promised to enact, which could be perceived as knowingly making false and/or misleading statements.

Failure to fulfil fiduciary duties with regards to diversity is another recurring theme throughout the lawsuits. Senior leadership teams will likely be under scrutiny with regards to diversity, as will the diversity policies and procedures already in place (and when they were put in place), including those pertaining to HR and hiring. Outdated frameworks with weak commitment to diversity won’t be tolerated, and allegations of breaches in directors’ fiduciary duties can follow.

The big question for agents, brokers and their clients is whether a D&O policy will respond should they face such litigation.

Possible coverage exclusions

Where a shareholder brings the suit on behalf of the company against the directors, many states (particularly Delaware, which is a popular incorporation state) do not permit companies to indemnify their directors for the settlement. This means that the settlements are typically paid for by the directors themselves or by insurance. D&O policies will usually respond via the Side A, or via a Shareholder Derivative sub-limit if endorsed onto the policy. In the case of a securities action against one or more directors, a company can indemnify its directors for both legal costs and settlement indemnity. Subject to financial capability and an indemnification provision, the Side B would respond.

The main exclusion would be the Conduct exclusion. This excludes claims arising out of the gaining of financial advantage, personal profit or by committing a fraudulent act or omission. The latter is the most pertinent, as plaintiffs may allege that a company’s directors and officers knowingly disclosed false or misleading information about a company’s commitment to diversity. However, this exclusion is usually only enforceable after a final, non-appealable adjudication determining this to be the case. Policies would likely look to defend the accused against these allegations during the litigation process, but if a guilty verdict was issued, then the exclusion would be brought into play.

Underwriting pressure

So with D&O and EPL insurers becoming increasingly aware of the rising risk of diversity and inclusion lawsuits, agents and brokers can expect underwriters to include an analysis of a their clients’ diversity and inclusion controls, procedures and training in their underwriting rationale.

While they may not be diversity and inclusion specialists, brokers and agents can help their clients allay D&O and EPL insurers’ concerns over potential future lawsuits by encouraging them to review their policies and procedures. For example:

Nominate a board member with clear accountability for achieving the company’s diversity objectives. Establishing a diversity sub-committee at board level, as well as a diversity committee at employee level, can encourage discussion, engagement and action.
Remove gender or ethnicity specific information from CVs and cover letters and ensure there is at least one black or ethnic minority interviewer as part of a panel to help ensure a fairer interview process.
Implement training in anti-discrimination, diversity and inclusion for all employees, executives and board members by outside consultants.

Diversity and inclusion issues are firmly in the spotlight on the world stage. If companies aren’t proactive at reviewing and/or strengthening their controls and frameworks, underwriters will likely take a dim view given the potential risk of a hit to reputation, lawsuits, and in extreme cases, share price.

Specific Technologies Driving Insurtech Investment in 2024

Understanding the Funding Decline The decrease in funding does not necessarily spell trouble for the insurance sector but instead highlights a strategic shift, the report suggests. “The insurance industry, like many sectors, is focusing on the most promising ventures with substantial insurance potential,” the report explains. “Insurers are directing their investments toward key areas and current trends such as embedded insurance, employee benefits, and cyber risk management. This strategic investment approach signals a forward-looking mindset within the industry.” Three Key Insurtech Trends for 2024 The report identifies three major trends shaping insurtech investments in 2024: Public Insurtech Companies: Financial and Growth Strategies The report also notes that public insurtech companies are prioritizing revenue growth as their main goal. These firms are restructuring their financial strategies to boost cash flow and capitalize on rising revenue streams. Their growth prospects are supported by expanding asset portfolios and strong market demand. “Public insurtech companies are focusing on revenue growth and optimizing their financial frameworks to increase cash flow,” the report states. “The growth potential for these companies is driven by increasing revenue opportunities, broadening asset bases, and a robust market for their services.” In summary, while global insurtech funding saw a decline in 2023, the industry’s focus on GenAI, digital process management, and connected insurance technologies is setting the stage for a dynamic and forward-looking 2024.

Business

Insurer Secures Unanimous Supreme Court Victory in New York Choice of Law Dispute

In the world of sports, a clean sweep, a shutout, or a perfect game is the ultimate achievement. In the legal arena, a unanimous decision from the U.S. Supreme Court is equally rare and significant. In a notable legal triumph, Great Lakes Insurance SE achieved a unanimous 9-0 victory in the Supreme Court on February 21, 2024. This victory follows a protracted legal battle that began in the District Court of Pennsylvania, advanced to the U.S. Court of Appeals for the Third Circuit, and culminated in the Supreme Court’s decisive ruling. Background of the Case: Great Lakes Insurance SE v. Raiders Retreat Realty Company The heart of the dispute was the insurance contract’s clause selecting New York law to govern any future legal conflicts. Although the financial implications of this case were relatively minor compared to the broader marine insurance industry, the insurer’s determination to uphold a crucial maritime legal principle has significant long-term implications for marine insurance. Faced with the insured’s counterclaims—including allegations of breach of fiduciary duty, insurance bad faith, and violations of Pennsylvania’s Unfair Trade Practices Law—the insurer was confronted with serious risks. Such claims could lead to the shifting of attorney’s fees, treble damages, and more, which might normally encourage insurers to settle rather than risk pursuing justice. However, Great Lakes Insurance, supported by The Goldman Maritime Law Group, opted to challenge the Third Circuit’s decision and seek clarity from the Supreme Court. Supreme Court Ruling: A Landmark Decision In a landmark ruling, Justice Brett Kavanaugh affirmed that choice of law provisions in maritime contracts should be upheld by default. This ruling is a major victory for establishing a consistent federal standard in maritime law and avoiding a patchwork of state laws that could complicate marine insurance disputes. The Supreme Court’s decision overturned the Third Circuit’s earlier judgment, which had questioned whether Pennsylvania’s public policy concerns might override the insurance contract’s choice of New York law. By upholding the New York choice of law clause, the Supreme Court eliminated the extra-contractual bad faith claims under Pennsylvania law, thereby ensuring that the dispute could be resolved based on the merits of the insurance claim itself. Significance of the Supreme Court’s Decision This ruling represents a significant advancement in maritime law, affirming that choice of law clauses in maritime contracts are generally enforceable. The decision establishes a clear, uniform legal framework for resolving maritime contract disputes, which will streamline the process and ensure fair adjudication of future insurance claims. Justice Clarence Thomas’s concurring opinion was particularly notable for its criticism of the 1955 Wilburn Boat v. Fireman’s Fund Insurance decision, which had previously influenced maritime insurance law. Thomas argued that Wilburn Boat was incorrectly decided and stressed that a uniform and enforceable set of rules is essential for the development of maritime law. Impact on the Marine Insurance Industry The Supreme Court’s decision sets a “bright-line” rule affirming that choice of law clauses are valid unless there is a strong argument against the selected jurisdiction. By endorsing New York’s insurance laws as a reasonable choice, the ruling supports a more consistent and predictable legal environment for marine insurers. This decision represents a major step forward in maritime law, helping insurers better assess risks, determine premiums, and ensure fair and efficient resolution of maritime insurance disputes.

Is diversity the next big D&O risk?