ANNUAL REVIEW

D&O Risk & Liability 2015

April 2015  |  RISK MANAGEMENT

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In these litigious days, a thorough awareness of the risk and liability issues faced by directors & officers (D&Os) is a prerequisite for businesses intent on surviving the considerable pitfalls that exist within the corporate world. As a direct result of the 2008 global financial crisis, the risks faced by D&Os have grown exponentially and new exposures arising from compliance, discrimination, tax, bribery and antitrust rules have taken root amid the fiduciary responsibilities board members have to investors and company constituents.

 

UNITED STATES

K. Bain Head

McGriff, Seibels & Williams

“In a June 2014 speech, Mary Jo White, the chairwoman of the United States Securities and Exchange Commission (SEC), described corporate board members as a company’s “most important gatekeepers”, highlighting board member fiduciary responsibilities to investors and other company constituents. Heightened regulatory attention of board members’ roles and responsibilities, and the failure to carry out those responsibilities, extends beyond the SEC to the Department of Justice (DOJ), state attorneys general and other foreign, federal, state and local regulatory bodies. Bank directors, in particular, face heightened regulatory scrutiny and new and evolving regulations seeking to limit the ability of financial institutions to indemnify or otherwise fund expenses against certain types of claims.”

 

MEXICO

Gerardo Antonio Jacobo Kanan

Financial Lines Advisory Group

“Mexico is facing a new business environment due to the new legislation changes, so there is moderately uncertain risk. Specific regulation separates personal damages from state damages, so that in some cases in which the state is seeking to be reimbursed, it could file an action separately from the public officer and from the public institution he works for. However, recent legislation changes are modifying not just the form of complaint from the affected parties but also the final judgments of the courts. In cases of civil liability for professional services, the courts have considered an indemnity payment under punitive damages. This concept has been taken from different points of view within different practice areas for deeper study. The insurance market is concerned, since this judgment could be a new legal challenge for insureds to deal with.”

 

BRAZIL

David Gonzalez

AIG

“It was only at the end of the 1990s and beginning of the 2000s, when the world watched the Enron and WorldCom cases, that Brazil adopted laws and rules defining clear and direct liability for board members. Before that, claims against board members were mostly limited to securities claims. During the last 10 years, though, the landscape has changed significantly, with various cases in which executives were prosecuted in court, shifting considerably the risk perception faced by board members. Add to that the recent series of highly publicised corporate issues in Brazil and we now have a situation in which D&O insurance is front and centre at board of directors meetings and risk management committees.”

 

UNITED KINGDOM

Julian Elms

Catlin Insurance Company

“Increased personal risks are growing from a number of areas, as recent incidents have demonstrated. Arguably, the main emerging headline risk comes from cyber exposures as companies struggle with the frightening prospect of breaches of privacy or theft that can give rise to potentially devastating financial consequences. Regulators, as was expected after the global financial crisis, are wielding more power against banks and other financial institutions. Whistleblowing legislation, which allows for the disclosure of bad business practices that some companies would rather hide, is gaining some traction. Whistleblowing now has a higher profile, though this may be a gradual problem as unlike in other countries a reward for the whistleblower is not available.”

 

FRANCE

Nicolas Pelletier

HCC Global

“There is no doubt that the personal risks facing board members are on the rise for a variety of reasons. There is clearly heightened scrutiny of directors by both shareholders and regulators on the back of the 2008 financial crisis, the latter having decided, for example, to flex their muscles in respect of bribery and corruption. The recent increase in IPO and M&A activity also exposes board members to more litigation, while the uncertain economic climate in France may lead to a potential rise in bankruptcies. Looking a little into the future, the fairly new law allowing consumers to file class actions may change the French legal landscape and further increase board members’ personal risks, but it is too early to tell.”

 

BELGIUM

Lot Goris

Aon Belgium sprl

“In our 2014 D&O risk liability survey, which is open to D&Os of all types of companies, 93 percent of respondents indicated that D&O liability risk has increased. When they were asked to explain their response, the number one cause cited for the liability risk increase was a rise in legislation. Other causes identified were more regulatory scrutiny, the difficult economic environment and the growing sense of a more litigious environment – indeed, more and more people are finding their way to the courts. More recently, board members have also indicated a growing concern toward cyber risk liability. D&Os are becoming more aware that a cyber attack not only exposes the company to financial losses but can also expose it to management liability.”

 

NETHERLANDS

Bart Claessens

Aon Risk Solutions

“Managing expectations, coping with internal versus external pressures, and meeting short and long-term targets. These are only a few of the challenges board members face when leading agile and sustainable organisations. So, overall standards company leaders have to meet are undoubtedly on the rise. The chances of being held personally accountable for anything that goes wrong within their organisation grow. Cyber risks are a very tangible example. D&O related claims have already been filed because boards have omitted to address those risks in an adequate manner. But there is obviously more to it. Ultimately, board members are the gatekeepers of the company’s reputation. So any threat that could jeopardise the corporate reputation should be on their radar – and that is quite a challenge.”

 

SPAIN

Ignacio Figuerol

Clyde Abogados SLP

“Changes to Spanish legislation have increased the risks that directors face. Directors’ liability is regulated under the Companies Act 2010, which was reformed in December 2014. The purpose of the reform was essentially to toughen the liability of directors for breaching so-called ‘loyalty duties’ to the company. To this end, the Act now defines much better the duties of directors in specific situations, and minority shareholders are given more options to bring actions for breach of this duty. In turn, the reform attempted to temper liability for negligence by introducing the ‘business judgment rule’ to our system.”

 

GERMANY

Alexander Stampf

HCC Global

“The personal risk of anyone acting in a managerial or supervisory function has been increasing steadily of late, including new exposures arising from compliance, discrimination, tax, bribery and antitrust rules. The level of uncertainty has never been higher as a result of high profile litigation, a variety of different insurance products and in some cases inconsistent advice from lawyers, consultants and insurance brokers.”

 

SWITZERLAND

Hendrik Jauer

XL Insurance Company SE

“The rate of change in the external environment has been extraordinary: the financial and sovereign debt crisis, the cross-border banking and tax controversy and the SNB decision to abandon the EUR/CHF minimum exchange rate are just a few examples. It seems as if shocks are more sudden and severe and may render certain business models obsolete. As a direct result of the financial crisis, law enforcement authorities, as well as regulators, have become more aggressive not only in going after companies but also individuals. This is especially true in the private banking and wealth management business where foreign authorities are pursuing tax evasion cases with a lot more rigor.”

 

SWEDEN

Mattias Fritz

AIG

“The number of claims against board members in Sweden is closely linked to the general economic environment and the number of bankruptcies. Given the strong economy, board members have lower risk of facing personal claims from creditors. However, other types of claims are increasing. This is partly explained by the increased scrutiny from regulators who are primarily concerned with anticompetitive and corruption investigations. Authorities today often cooperate across jurisdictions, facilitating the easier investigation of Swedish multinational companies. Board members may be included in the investigation or may be held accountable for lack of controls and routines of the company.”

 

RUSSIA

Vladimir Kremer

AIG

“D&O litigation in Russia remains relatively immature. Nevertheless, there is an increasing awareness about the existence of D&O insurance policies. Recently, there have been a number of high profile cases against directors, and the resulting widespread media coverage has served to highlight the degree to which directors face exposure and to further raise awareness. This growing awareness, coupled with difficult financial times, has led corporates, shareholders and other parties to look to board members to recover losses, which might otherwise have been written off. Judging from the enquiries we receive, one of the key areas of concern for directors is their exposure to claims arising from corporate tax liabilities. Indeed, there have been several well known cases where tax investigations against companies have led to serious repercussions for directors and officers, against whom separate investigations and criminal proceedings are then instigated.”

 

ISRAEL

Yael Navon

Levitan Sharon & Co.

“Directors today are facing personal risks which did not exist in the past, such as risks of environmental claims and exposure to cyber liability. In addition, directors’ exposure to ‘traditional’ risks has been increased due to the growing awareness of potential plaintiffs to their rights, the increase in the number of attorneys willing to file personal claims, and the strengthening of the enforcement acts taken by the authorities. Directors are specifically vulnerable in cases of financial crisis, as we witnessed several years ago. Israel is influenced by the financial non stability of other countries, and a financial crisis abroad often results in the collapse of Israeli companies.”

 

INDIA

P. Umesh

Aon Global Insurance Brokers Private Limited

“Personal risks for board members have significantly increased due to changes in Indian company law brought about by the Companies Act 2013. Various provisions of the Act, including the definition of duties of directors, introduction of the concept of class action suits, key managerial personnel, constitution of the National Law Tribunal, a code for independent directors, and the Serious Fraud Investigation Office (SFIO), have broadened the regulatory framework, increased the responsibility and accountability of management and professionals, emphasised the need for investment protection and attempted to bring the legislation up to speed with global benchmarks.”

 

JAPAN

Yasuro Tanabiki

Aon

“There has been gradual but consistent growth in the risks faced by board members over the course of recent history. In 1993, the Japanese Companies Act, then named the Business Code, was amended. Prior to 1993, the court administrative cost, also known as stamp duty, for filing litigation was based on the potential amount of claim filed. Under this system, if you want to bring an action claiming JPY100m – about US$830,000 – you have to pay JPY320,000 – about US$2700 – to the court, and this increased with the size of the potential claim. Under the amended statute, the administrative cost was reduced to JPY8200 – about US$68 – and this amount is fixed irrespective of the potential claim amount. This amendment opened the floodgate to representative actions.”

 

KOREA

Kevin Kim

Aon

“Korea used to be less litigious than the West, so the risks of being a director were relatively minimal. But this is no longer the case, as we are starting to see cases where a litigation process has been chosen for dispute resolution. Recently, the Financial Supervisory Service (FSS) introduced a new ‘Financial Institution’s Corporate Governance Norms’ which requires outside directors to actively get involved in the process of leading the board of directors to make beneficial decisions for the financial institution, its shareholders and financial consumers. This is an example of the ever-increasing responsibility that board members are facing in the execution of their duties and the higher risks they face if and when things go wrong.”

 

CHINA

Jason An

Aon-COFCO Insurance Brokers

“As China’s Securities Law is being amended to change the IPO mechanism from approval to registration, and to further enhance investor protection in the wake of this dramatic change, the board members of publicly listed companies are likely to face higher risks and liabilities, including signing a personal warranty of liability. Other evolving factors, including China’s unrelenting anti-corruption campaigns and much called for enforcement of the environmental protection law, are expected to increase the risks for D&Os of public and private businesses. Increasingly D&Os are dealing with more complicated investment and divestment decisions in M&A transactions.”

 

HONG KONG

Regina Chen

Aon Risk Solutions

“One of the major personal risks in Hong Kong relates to regulatory investigations, such as the Independent Commission Against Corruption (ICAC). We have seen an increasing number of D&O claims involving investigation costs of late. The recent amendment to the Companies Act does not allow the company to indemnify a director if fraud or dishonesty is proven to have occurred. There might be also fines and penalties applicable – under the Competition Act, for example, the fine is up to US$8m per director. Emerging risks such as network security, privacy, and environmental liability also heavily increases directors’ liability exposures.”

 

TAIWAN

Adam Hsu

Aon Taiwan Limited

“We have seen an increasing number of cases in which D&Os are being sued in relation to contract disputes alleging misleading statements, misrepresentations or non-disclosure liability. Personal liability has not really increased in recent times except to the extent that increasing attention is being paid to governance matters which translates to higher scrutiny by regulators and shareholders and consequently increases the likelihood of claims – directors may find themselves personally responsible when funds are not available as indemnity or insurance or because courts hold them personally responsible.”

 

SINGAPORE

Mike Ang

Aon

“The role of board members continues to be shaped by several factors, including economic uncertainty, expansion and growth, the pace of technological change and ever more regulatory enforcements. Two specific factors prominent in Singapore include cyber risks, which led to the enforcement of the Personal Data Protection Act (PDPA) in 2014, as well as the newly amended Companies Act. The Companies Act is of particular significance because it allows company indemnification of its directors and officers against third party claims. Previously, this has been prohibited, unless there is a successful defence or acquittal to the claim or where the courts grant relief.”

 

MALAYSIA

Jasminder Kaur

Aon Risk Solutions

“Over the past 10 years, the level of personal risk facing board members has certainly increased, reflecting an ever challenging business environment. The increase in public awareness and expectation, and the more litigious nature of society, has resulted in a virtual explosion of litigation against directors as well as judicial analysis of the conduct and standards applicable to D&Os. The result is that D&Os are frequently being ‘second guessed’ by the courts. The personal assets of company directors and executives across Asia are now more exposed to threats from litigation than ever before.”

 

AUSTRALIA

Michael Pryce

AIG

“Australian directors have seen further legal impositions with new laws governing a diverse range of issues, including occupational health and safety, privacy and data protection. With over 800 separate laws and regulations in Australia, there have been widespread calls to simplify the legislative jigsaw that directors face. However, to date there has been no such relief. This complicated legislative framework, supported by an aggressive and well-funded regulatory regime, has created one of the world’s most severe class action environments, second only to the US.”

 

NEW ZEALAND

Michael Pryce

AIG

“One of the largest shifts in New Zealand has been the introduction of the Financial Services Market Authority (FMA) in 2011, when it replaced the Securities Commission. Its powers are wide-ranging and are accompanied by the introduction of Anti-Money Laundering and Investigation and Enforcement regulations, alongside the updating of the Securities Regulations 2009. Much of this regulation and compliance has been introduced by the National government, bringing New Zealand in line with global best practice for securities and compliance. However, this just reflects the local legal and regulatory environment. Data, privacy and cyber exposures are a growing threat to an economy that relies on the internet for connecting businesses locally and globally, which means that risks facing a board are increasing.”

 

SOUTH AFRICA

Kenneth van Sweeden

Auto & General

“Directors and officers (D&O) face numerous personal risks and these risks are constantly evolving. Factors influencing D&O claims include the demand for greater accountability, the changing legal landscape, economic drivers and technological, socio-political and environmental changes. For example, South Africa’s new Protection of Personal Information (POPI) Act is going to force organisations to change their attitudes towards IT security. Robust IT security practices will no longer be a luxury but rather, will make real business sense. South African D&Os will have to take the protection of personal data issue very seriously if they are to avoid future fines and reputational damage.”


CONTRIBUTORS

AIG

Aon

Aon Belgium sprl

Aon Global Insurance Brokers Private Limited

Aon Risk Solutions

Aon Taiwan Limited

Aon-COFCO Insurance Brokers

Auto & General

Catlin Insurance Company

Clyde Abogados SLP

Financial Lines Advisory Group

HCC Global

Levitan Sharon & Co.

McGriff, Seibels & Williams

XL Insurance Company SE


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