20 per cent of non-captive owners are considering forming a captive for directors’ and officers’ (D&O) liability insurance, according to a new survey by WTW. The 2022 Directors’ Liability Survey, produced in partnership with Clyde & Co, examined the use of alternatives to the commercial insurance market for D&O liabilities following significant price increases. In the report, global D&O coverage specialist Angus Duncan, management liability coverage leader Lawrence Fine, and D&O liability product leader John Orr noted that potential alternative solutions include using a captive for some or all of the corporate reimbursement cover (Side B) or company securities claims cover (Side C). In addition, companies can use a protected cell company or segregated account company for some or all of the non-indemnified loss cover (Side A) — although the report noted that this tends to be more expensive than simply purchasing insurance from the commercial D&O market. 6 per cent of respondents said their organisation had used a captive insurance vehicle for Side A insurance, compared to 5 per cent for Sides B and C. A further 18 per cent and 20 per cent respectively said they were considering implementing a captive in the future for these D&O liabilities. The survey named the top D&O risks facing directors and risk managers to be cyber attack, risk of data loss or data breach, cyber extortion, regulatory risk, and the risk of a health and safety or environmental prosecutions safety legislation. Highlighting cyber as a common risk, James Cooper, partner at Clyde & Co, explained in the report: “Cyber risk is a multi-varied and ever-evolving risk, with a variety of significant consequences should an attack occur and data is lost, making cyber risks of primary concern.” 65 per cent of respondents globally recognise the threat of cyber attacks as ‘very’ or ‘extremely significant’, compared to 56 per cent in the 2021 survey. Cooper continued: “Regulatory/administrative data protection fines have increased in volume and scale and, while the UK courts have sought to limit the scope of damages for immaterial losses, there is an evolving body of case law on a European level in terms of a company’s liability in this regard and an increasing risk that insufficient engagement with cyber issues poses a liability risk for directors and officers on many fronts, including class actions.” The risk of shareholder actions remains of high concern to insurers. The report notes that these filings hit a peak between 2017 and 2020 during a significant increase in cases relating to mergers and acquisitions that were often settled quicker and cheaper than core filings. Although the number of US securities class action filings declined in 2021, the report predicted that several other trends could reverse these gains in 2022, such as cases relating to special purpose acquisition companies, and new filings relating to COVID-19. WTW added that although cyber-related securities class actions have not yet had a major impact on the number of new filings or settlements, this could have a significant impact on trends in the near future. The report noted an increase already in securities class actions filed by investors in cryptocurrencies, often alleging the defendants offered or sold unregistered securities in violation of securities laws. The survey also named the top D&O risks facing business operations to be the economic climate, cyber attacks, COVID-19 and lockdown measures, technological advances, climate change, and the geopolitical climate.
