Key Risks for Directors, Officers to Watch in '22

Risks include market volatility, the prospect of pandemic-related insolvencies, rising scrutiny on ESG and the urgency of cyber resilience.


Board members and company executives can be held liable for an increasing range of scenarios. Today’s market volatility, with the increased threat of asset bubbles and inflation, the prospect of a growing number of insolvencies due to the pandemic environment, together with rising scrutiny around the environmental, social and governance (ESG) performance of companies and the urgency for robust cyber resilience are key risks for directors and officers (D&Os) to watch in 2022, according to the latest annual D&O report by Allianz Global Corporate & Specialty (AGCS).

Uncertain insolvency issues continue to be key topic in the D&O space

The withdrawal of support for companies established during the pandemic sets the stage for a gradual normalization of business insolvencies in 2022. The Euler Hermes Global Insolvency Index is likely to post a +15% y/y rebound in 2022, after two consecutive years of decline (-6% forecast in 2021 and -12% in 2020). 

While the wave of insolvencies has so far been milder than anticipated, mixed trends are expected across the world. In less-developed markets, such as Africa or Latin America, the number of insolvencies is expected to increase faster compared with more developed economies, such as France, Germany and the U.S., where the impact of the governmental support is expected to last longer. 

Traditionally, insolvency is a major cause of D&O claims as insolvency practitioners look to recoup losses from directors. There are many ways that stakeholders could go after directors following insolvency, such as alleging that boards failed to prepare adequately for a pandemic or for prolonged periods of reduced income. 

Market volatility, climate change and digitalization key issues 

The financial services industry, but also companies from other sectors, continues to face multiple risk management challenges in the current economic climate. Markets are likely to become more volatile with the increased risk of asset bubbles and inflation rising in different parts of the world. At the same time, more banks and insurers are expected to assign individual responsibility for overseeing financial risks arising from climate change, while investors are paying closer attention to the adequate and timely disclosure of the risk that it poses for the company or financial instrument they invest in. The tightening regulatory environment, the prospect of climate change litigation or ‘greenwashing’ allegations could all potentially affect D&Os. 

Meanwhile, digitalization has accelerated following COVID-19, creating enhanced cyber and IT security exposures for companies. This requires firms’ senior management to maintain an active role in steering the ICT (information and communication technologies) risk management framework. 

See also: CISOs, Risk Managers: Better Together

IT outages and service disruptions or cyber-attacks could bring significant business interruption costs and increased operating expenses from a variety of causes, including customer redress, consultancy costs, loss of income and regulatory fines. Last, but not least, brand reputation can also suffer. All this can ultimately affect a company’s stock price, with management being held responsible for the level of preparedness.

Heightened litigation risk in the U.S.

Litigation risk continues to be a top D&O concern, in particular around shareholder derivative actions, which are increasingly being brought on behalf of foreign companies in U.S. courts. 

Since early 2020, a group of plaintiffs’ firms has brought more than 10 derivative lawsuits in New York state courts on behalf of shareholders of non-U.S. companies seeking to hold directors and officers legally and financially accountable for various breaches of duty to their corporations. 

The financial hurdles to bring suit in the U.S. are significantly lower than in many other countries, and U.S. courts and juries are considered more plaintiff-friendly than many others around the world. The consequences to directors and officers forced to defend themselves in derivative litigation before U.S. courts can be severe. In what may turn out to be a record-setting settlement for a U.S. derivative lawsuit, in October of this year defendants agreed to pay a minimum of $300 million to settle litigation brought in a New York state court by shareholders of Renren, a social media corporation based in China, and incorporated in the Cayman Islands, after allegations of corporate misconduct.

Elsewhere in the U.S., the report notes that a decision by the Delaware Supreme Court in 2019, Marchand v. Barnhill, which focused on the fallout from a listeria outbreak, is potentially leading to greater exposure for individual corporate directors in the form of shareholder derivative suits, as it is seen to have lowered the previously high standard required for plaintiffs to prove a board’s failure to comply with their duty of care, as established in the landmark Caremark Int’l verdict in 1996. Board members must accordingly re-examine whether there is sufficient Side A cover (which covers liabilities incurred by an individual in their capacity as a director or officer) in their D&O insurance program.

Scrutiny over SPACs

Another emerging risk in the global D&O insurance space comes from the growth of so-called Special Purpose Acquisition Companies (SPACs), also known as "blank check companies." These represent a faster track to public markets. Advantages fueling the growth of SPACs over traditional initial public offerings (IPOs) include smoother procedures, less regulatory and process burdens, easier capital sourcing and shorter timelines to complete a merger with target companies. 

During the first half of 2021, the number of SPAC mergers in the U.S., both announced and completed, more than doubled the full year total of 2020, with 359 SPAC filings raising a combined $95 billion. The growth of SPACs in Europe may not match the scale of the U.S. boom, but there is still a growing expectation that it will increase despite a less favorable company law environment compared with the U.S. In Asia, the market is slowly gaining momentum, with a significant uptick in companies in China, Hong Kong and Singapore as a new route to accessing capital markets.

See also: Where Were the Risk Managers for King’s Landing?

SPACs carry a set of specific "insurance-relevant" risks, and losses are already reported to be flowing through to the D&O market as both the SPAC and the private target company typically obtain D&O coverage. Exposures could potentially stem from mismanagement, fraud or intentional and material misrepresentation, inaccurate or inadequate financial information or violations of rules or disclosure duties.

In addition, a failure to finalize the transaction within the two-year period, insider trading during the time a SPAC goes public, a wrong selection of a target to acquire or the lack of adequate due diligence in the target company could also come into play. Post-merger the risk of the go-forward company to perform as expected or failure to comply with the new duties of being a publicly listed company also needs to be considered.

To learn more about D&O risk trends, please see the full report at AGCS annual D&O report: 2022.

Joseph Caruso

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Joseph Caruso

Joseph Caruso is regional head of financial institutions in North America for Allianz Global Corporate & Specialty. Based in New York, Caruso joined AGCS in 2015 as regional head of financial institutions, NA and helped launch the financial lines practice.

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