Cyber and ESG-related risks are driving an increasing number of lawsuits and litigation against companies and their boards says the AGCS Directors and Officers Insurance Insights 2023 report.
Which are the main factors driving the possibility that a company and its board of directors may be sued by investors or other stakeholder groups in 2023? A lack of robust cyber security and governance processes, or an inadequate or non-compliant response to environmental, social and governance (ESG) issues are among the key risk trends in the Directors and Officers (D&O) insurance space, according to Allianz Global Corporate & Specialty (AGCS).
Issues such as data security and information protection are now core areas to watch for directors, the report notes. Investors increasingly view cyber security risk management as a critical component of a company’s board risk oversight responsibilities. As fiduciaries, board members are therefore expected to develop and maintain accountabilities for IT security before, during and after any cyber incident. Alleged failures can be seen as a breach of duty.
“Around the world, directors have already been called to account, including in derivative and direct litigation, due to their alleged failures to institute appropriate governance and protection against cyber security risk. Moreover, major breaches experienced by publicly traded firms have damaged investor confidence, causing share price drops, and thereby becoming ‘events’, which again can give rise to costly class action securities litigation. Boards therefore need to initiate and implement a cyber risk management structure that covers the entire organization,” says Rishi Baviskar, Global Cyber Experts Leader at AGCS’ Risk Consulting team.
Regulatory action or litigation risks due to ESG-related issues are another major concern for boards, driven by increasing reporting and disclosure requirements around such topics, which could trigger claims in case of an inadequate response or non-compliance. In addition, companies and their boards also face the prospect of increasing litigation from environmental or climate groups, activist investors or even their own employees. Climate change litigation is increasing, with over 1,200 cases filed internationally in the last eight years, compared with just over 800 cases between 1986 and 2014. Most of these were filed in the US, but there are increasing filings at international courts or tribunals: 2021 saw the highest annual number of recorded cases outside the US. Another risk is misrepresenting ESG credentials or achievements – so-called greenwashing – which can also lead to regulatory action, litigation, and shareholder suits.
“ESG-related information is increasingly becoming a key checkpoint for insurers when it comes to the risk assessment of a company. Those companies with strong ESG frameworks and governance will likely find insurers more willing to offer capacity,” says Vanessa Maxwell, Global Head of Financial Lines at AGCS.