D&O liability challenges in uncertain economic times

Lockton, the world’s largest privately owned insurance broker, recently released its Directors and Officers (D&O): Trends and Insights report, focusing on the New Zealand market.

The report found that directors and officers of companies are facing some major challenges from difficult economic conditions, along with a cybersecurity environment in which attacks are becoming more frequent.

It reveals the typical cost of a security incident is about US$263,000, while the average is more than US$25 million — and a “terrible cyber event” might cost US$52 million.

Tanya Washer, head of Professional and Financial Risks at Lockton New Zealand, says one of the primary issues is the difficult macroeconomic environment, which has put pressure on companies' balance sheets and financial strength.

“Insurers are adopting a cautious approach, especially with businesses grappling with rising debt obligations and uncertain long-term growth prospects,” she says.

“This is particularly concerning for sectors like retail and hospitality, which have been heavily affected by reduced consumer discretionary spending.”

The report highlights how difficult economic conditions tend to lead to increases in corporate insolvencies and liquidations, which means more risk for D&O insurers.

“We expect this trend to continue as creditors and stakeholders seek to recover losses from directors for perceived failures in their duties,” adds Washer.

What can insurers do?

The report notes that companies may need to consider whether their current defence cost limits are adequate given the changing nature of both the market — where events such as cyber incidents are becoming more frequent and expensive — and the rising legal costs and increasing time it takes to resolve claims.

Insurers have a role in communicating these issues and challenges to their clients to educate them about appropriate policies.

Due to the complexity of D&O claims, it is not unusual for multiple law firms to be involved, the report finds, as each director or officer may require, or want, separate legal representation. 

In addition, the legal landscape in New Zealand changed in 2013 with the Supreme Court decision in BFSL 2007 Limited & Ors v Steigrad.

“This ruling allows for a statutory charge under the Law Reform Act 1936, meaning that the main policy limit is preserved for the payment of compensation to third parties and cannot be eroded by the legal costs of defending a claim,” explains Washer.

The general rise in ransomware and cyber extortion attacks, as well as high-profile data breaches, means cybersecurity is a top priority in boardrooms. There are also new and emerging risks for those companies embracing AI.

“One key challenge is ensuring transparency and avoiding the misrepresentation of AI capabilities, a practice known as AI-washing,” says Washer. “Exaggerating the role of AI in a business can expose directors to reputational risks and potential claims from stakeholders.

“Furthermore, integrating AI into business operations may create new vulnerabilities for cybercriminals to exploit, adding complexity to an already challenging cyber risk landscape.”

Changing market dynamic

Another notable trend is the growing interest from overseas insurers in the New Zealand D&O market, particularly for excess layer policies. “This additional capacity from international players has increased competition, potentially offering companies more options in their D&O coverage,” explains Washer.

“However, while competition has increased, insurers are still maintaining a prudent approach to pricing. Premium rates are being carefully calibrated to ensure they remain sufficient to cover rising claims costs, especially given the risks of insolvency and litigation in the current economic environment.”

This approach suggests insurers understand that it would not be prudent to compete on price in such an uncertain market and that most should be able to maintain their margins.

“Looking ahead, we anticipate that current D&O market conditions will remain stable, provided there are no significant adverse claims trends or global events that impact the broader insurance sector,” says Washer.

In such an environment, proactive insurers will understand the importance of education around these issues for both existing and potential clients. 

“We also foresee continued interest from overseas D&O insurers in the New Zealand market,” says Washer.

“International insurers recognise the value of participating in this region, helping to maintain competitive pricing and offering local companies access to a wider range of coverage options.”

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