In this chapter of our Annual Insurance Review 2020, we look at the main developments in 2019 and expected issues in 2020 for directors and officers.
Key developments in 2019
As predicted in last year's Annual Insurance Review, we have seen an increase in market abuse investigations by the Financial Conduct Authority (FCA) impacting directors and officers cover. This corresponds with the FCA's mission statement that “preventing, detecting and punishing market abuse is a high priority for us” and their goal to crack down on individuals who fail to meet their obligations under the Market Abuse Regulations (MAR).
As with Serious Fraud Office (SFO) investigations, FCA market abuse investigation costs and subsequent defence costs are significant, as it is common for the FCA to investigate multiple directors. The FCA also requires numerous other individuals to assist them in their investigations, made possible due to the FCA's broad powers to compel information relevant to its investigations.
The knock-on effect of market abuse investigations for Directors and Officers Insurers has been an increase in claims by shareholders against companies under section 90A of the Financial Services and Markets Act 2000. Most Directors and Officers policies will cover the companies' costs of defending a securities claim and these claims are extremely costly to defend. We understand that litigation funders have agreed to fund the following shareholder actions (which are either related to market abuse or closely connected) against Petrofac, Metro Bank and Glencore and are investigating shareholder actions in relation to Patisserie Valerie.
What to look out for in 2020
We anticipate that in 2020 we will see a rise in claims against directors related to the environment and climate change. We expect that efforts to increase publicity around the dangers of climate change will become more sophisticated and there will be an increase in activists purchasing shares in "environmentally unfriendly" companies to allow them to bring derivative claims against the directors and/or companies.
Whilst this is likely to be of more concern to directors/companies where the companies are engaged in high profile "environmentally unfriendly" activities (oil and gas companies), there are many companies indirectly involved including transportation and manufacturing companies. Claims could extend to asset managers (and other professionals) who have failed to consider the risk of climate change when considering what investments to buy/sell.
We expect that claims will be framed in breach of directors' duties. Directors have a duty to promote the success of the company for the benefit of the members as whole and should have regard to "the impact of the company's operations on the community and the environment" (section 172(1)(d) Companies Act 2006). In the current political climate this is likely to take on increased importance in directors' decision making and reporting to the company/shareholders.
Potential claimants will be watching to see how the high profile cases involving ExxonMobil play out. The first concerns the New York Attorney General's claim against ExxonMobil for allegedly defrauding investors by downplaying climate change risks to the business. The second involves the shareholders claim against several ExxonMobil directors for failing to protect their investments and company from the risks of climate change.
Directors and Officers Insurers should carefully review their policy wordings to ensure they cover the risks that they intended to cover.