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Executive risks grow as SEC climate disclosure rules evolve


A heightened federal regulatory environment, including interest in environmental, social and governance issues, could make the directors and officers liability insurance market more difficult.

Among recent regulatory developments, a Securities and Exchange Commission clawback rule adopted in October requires, in cases where stock issuers must prepare an accounting restatement, the recovery of erroneously awarded incentive compensation paid to current or former executive officers for the preceding three-year period. 

In August, the SEC adopted “pay vs. performance” criteria, requiring registrants to disclose information detailing the relationship between executive compensation and the registrant’s financial performance.

An SEC rule on climate-related disclosure issues is also anticipated. 

In September, the Department of Justice updated an October 2021 memo and announced new guidelines for prosecutors to use when assessing corporate criminality, stating its first priority in corporate criminal matters is to hold individuals accountable. 

In a Jan. 17 speech, assistant attorney general Kenneth A. Polite, Jr. announced revisions to its enforcement policy, stating they “provide specific, additional incentives for voluntary self-disclosures as well as for cooperation and remediation.”

Matthew McLellan, Washington-based managing director and D&O product leader for Marsh LLC, said federal regulatory activity is “an area that underwriters are pretty concerned about.”

“When you have large government investigations, that really does provide a road map for the plaintiffs bar” that is even better for them than a short seller report, he said.

ESG, in particular, is a concern, experts say. 

ESG will continue “to really require a lot of attention,” with insurers looking in greater depth at what companies are doing in this area, said Scott Seaman, a partner with Hinshaw & Culbertson LLP in Chicago.

Matthew Azzara, New York-based head of management liability for North America at Allianz Global Corporate & Specialty, said the compliance requirements surrounding ESG and the prospect of regulatory and legal action “can very much impact” D&O policies.

He said it is important that policyholders neither understate nor overstate their ESG disclosures. Companies with “robust and realistic frameworks” will likely find procuring insurance easier, he said.

Insurers raise ESG in discussions, “but they don’t ask very specific questions,” said Larry Fine, New York-based management liability coverage leader for Willis Towers Watson PLC.

“They tend to have one or two questions about climate, and sometimes one or two questions about diversity in discussions,” he said, adding that ESG does not appear to be a direct factor in determining pricing. 

Ernest Martin Jr., a partner with Haynes & Boone LLP in Dallas, said insurers will question how vocal companies are on certain “hot-button” ESG issues.

“I wouldn’t be surprised if down the road you begin to see some exclusions that might apply” in this area, he said.

One of the challenges of underwriting ESG-related risk is that it is an amorphous term that encompasses a wide range of risks, experts say. 

“It’s this big, broad topic” and there is a belief it can be quantified and measured and used in underwriting, which is “optimistic at best,” said Kevin LaCroix, executive vice president in Beachwood, Ohio, for RT ProExec, a division of R-T Specialty LLC.

Meanwhile, experts predict the SEC’s anticipated climate disclosure rule could lead to more securities litigation and higher D&O rates.

One of the ironies of the situation is that companies that make forecasts may be more likely to be hit with litigation for making unkept promises than companies that set no climate-related goals, observers say.

“The more disclosures, the more they open themselves up to scrutiny, but those that are doing the wrong thing and not talking about it are still a cause of concern,” said Patrick Whalen, a New York-based underwriter on Beazley PLC’s executive risk team.

A related issue is the possibility of litigation arising from so-called anti-ESG legislation. These laws, primarily enacted in conservative states, generally restrict state entities from doing business with financial institutions that will not invest in companies associated, for instance, with fossil fuels or firearms. 

In December, Florida Chief Financial Officer Jimmy Patronis announced that the state would divest its investments from management by BlackRock because of its pro-ESG stance.

In January, Texas Attorney General Ken Paxton said he had made a decision that “has the effect” of Texas halting Citigroup C.N.’s ability to underwrite most municipal bond offerings in the state because it had discriminated against the firearms sector. Citigroup has denied the charge.

William G. Passannante, a shareholder with Anderson Kill P.C. in New York, said the anti-ESG issue could prompt litigation

Experts say another area of concern is the SEC’s whistleblower awards. 

Mr. Fine said the SEC “is more active every year” in awarding record amounts — an indication the agency “has stepped up its game a bit.” 

The agency awarded more than $5 million to a whistleblower in January, which followed a more than $20 million award in December, a $20 million award in November and a more than $10 million award in October.