Regulatory environment puts D&Os in firing line

Directors and officers (D&Os) in the US are at greater risk of liability claims and other risks as regulatory changes continue to prompt auditors to up numbers of investigations.

Beazley warned that D&Os are now facing exposures that extend “well beyond traditional claims”, such as securities class actions and derivative actions. But of most concern is the rising number of audits.

The warning comes as the insurer expanded its policy wordings to cover the “growing threat” posed by regulatory investigations and inquiries.

The firm’s head of global liability management Neal Wilkinson told StrategicRISK that in addition to rising numbers of investigations, businesses are being audited even when no formal allegations have been made against them.

He said: “There have been an increased number of corporate investigations and inquiries generally. The Sarbanes-Oxley Act created new requirements and procedures which can bring issues to light. In the US, the regulators are now often requiring self-investigation, so that companies now face the costs that regulators would have borne.”

“We are seeing more situations where there is no wrongful act being alleged – and most policies are triggered by a wrongful act. In many cases directors or officers are being required to provide evidence for an investigation where they may not be a current target for enforcement, but could become so subsequently.”

“Generally D&O policies would only respond if there was a formal charge or a Wells notice [from the US Securities and Exchange Commission], but now it is a case where [regulators] are essentially saying ‘we think you’ve done something wrong but you need to tell us why you think you haven’t’.”

The inquiry coverage provided under the new Beazley wordings is written on a reported basis. This enables the directors and officers to choose when to report an inquiry to underwriters without the risk of being penalised for late reporting.