Recent harassment-related investor suits could bring a whole new frontier of directors’ and officers’ (D&O) and liability exposure for insurers, according to ratings agency AM Best.
Gone are the days when sexual harassment allegations could be swept under the rug. Now more companies are facing public outrage, stock price downturns and investor unrest when their executives misbehave. And all that is translating into a new type of risk in the D&O liability market.
Along with a general uptick in securities litigation overall, companies are now seeing shareholder lawsuits driven by #MeToo, AM Best noted in a recent briefing. The movement has gained power through social media, where accusers can rapidly expose and spread awareness of alleged misdeeds – often committed by powerful men in high-profile positions such as media, politics, sports, entertainment and the C-suite.
Such allegations “have the potential for loss creep from employment practices liability to D&O as the board’s involvements and their roles and responsibilities get scrutinised”, AM Best said in its report.
Over the past year, lawsuits by investors have followed on the heels of sexual misconduct allegations against Las Vegas casino magnate Steve Wynn, former CBS chief executive officer Leslie Moonves, and former Lululemon Athletica CEO Laurent Potdevin. Other investor lawsuits were filed against Nike and Google parent Alphabet, as well as their executives and board members, over allegations of widespread toxic cultures.
With more securities cases arising over #MeToo, D&O claims are soon to follow. The recent harassment-related investor suits could be the beginning of a whole new wave of D&O and liability claims, explained Kevin LaCroix, executive vice president of insurance intermediary RT ProExec, and author of the D&O Diary blog.
“We could see a thrust of complaints addressing not just allegations of sexual misconduct, but the real harm that comes from these boys’ club atmospheres that disadvantage women in terms of compensation and advancement within the company,” he stated in an interview with The Insurance Insider.
At the same time, D&O claims are rising overall amid an increase in federal securities class actions over the past few years. Securities class action filings in 2017 were 52 percent higher than in the previous year, according to data from the Securities Class Action Clearinghouse.
This past year was on track to match 2017’s class action volume.
The D&O market’s annualised direct loss ratio declined to 55.5 percent as of 30 September 2018, down 7.4 points on the reported 2017 loss ratio and more in line with 2015 and 2016 performance.
Loss ratios are, however, forecast to continue rising this year, and will put carriers under increasing pressure if D&O rates in certain segments remain flat as expected.
Along with #MeToo, other recent contributors to the upward claims trend are cyber losses and digital privacy concerns – such as the controversy surrounding Facebook privacy lapses – according to AM Best.
Both #MeToo and privacy claims “have been tremendously impacted by social media’s effect on the speed, strength and breadth of the movement”, leading to a growing number of lawsuits alleging corporate misconduct, AM Best noted.
The ratings agency suggested corporations “choose to be proactive by providing necessary training, including scenario role play” and “further educating employers about potential misconduct or harassment issues”.
“Helping policyholders/clients take steps to avoid sexual misconduct allegations would exemplify product risk management for D&O insurers,” AM Best added.