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Businesses should review their directors and officers liability insurance and other policies to better understand how they would protect them from a widening array of claims arising from environmental, social and governance risks, a panel of experts said Wednesday.
Heightened SEC enforcement actions against investment advisers, on whistleblower tips, and on company disclosures, show the increased attention being paid to ESG exposures by the government, said William Passannante, shareholder at Anderson Kill P.C. in New York.
Shareholder derivative actions against boards on diversity, equity and inclusion policies, securities class-action lawsuits against companies on ESG-related issues that allegedly lead to stock drops, and backlash restricting ESG activities are other potential areas of liability where D&O issues may arise, Mr. Passannante said.
ESG consists of an umbrella term of three exposure classes, but not everybody agrees on what exactly those definitions are, said Stacy Parker, managing director and an attorney in the legal claims group of the financial services group, commercial risk solutions at Aon PLC. “Those definitions can be shifting,” Ms. Parker said.
In the changing regulatory, legislative and litigation landscape, company executives may feel like “they’re damned if they do, and damned if they don’t” when it comes to ESG, she said.
“As risk managers, boards, corporations and their advisers try to navigate a ship in choppy waters back to safe water, the process of if and how and when boards and companies identify, disclose, explain, measure on time and mitigate ESG risk is important to the D&O marketplace,” she said.
Clients are asking questions in a D&O insurance recovery context about what to do with these increasing risks, said Diana Shafter Gliedman, shareholder at Anderson Kill.
“It is important to think about ESG when procuring insurance coverage, to consistently review your insurance program, both the D&O policies and the other policies that may act in tandem, to make sure you have the most up-to-date policies and that you are aware of the various exclusions and endorsements,” Ms. Shafter Gliedman said.
Different coverages may intersect in an ESG-related claim, said R. Damian Brew, managing director and national practice leader, FINPRO claims at Marsh LLC. “You may have a situation where your crime and your cyber policy and your D&O policy are interacting,” Mr. Brew said.
That may raise questions about how the Side A coverage that’s designed just for directors and officers may intersect with other policies, he said. “On D&O policies we want to make sure that everybody is covered. Thinking about who is going to be covered if you have a non-indemnifiable claim can be very important,” he said.
Intuitively, you would think that companies and directors and officers that were lagging behind on ESG initiatives would be a bad D&O insurance risk, “but that’s not really the case,” said Raymond A. Mascia Jr., shareholder at Anderson Kill.
“Actually, companies that are proactive on ESG face potential liability,” Mr. Mascia said. For example, when a company announces it has significant sustainability efforts and it turns out that was a misrepresentation, or not entirely true, he said.
“Have policyholders in the insurance industry appreciated that aspect of this yet?” he said.
Panelists were speaking during Anderson Kill’s annual D&O seminar, which focused on D&O issues in ESG.