Environmental, Social and Governance (ESG) concerns are top of mind for directors and officers, and for good reason. Companies, and their boards, are being sued for failing to manage climate risks, damaging the environment, engaging in greenwashing (making misleading or unsubstantiated ESG claims) and failing to prepare for new environmental requirements.
Directors and officers may face several ESG-related liability risks, including securities claims (which includes securities litigation and shareholder or derivative claims), regulatory investigations, defense costs, fines and penalties, supply chain issues and employment claims stemming from discrimination and diversity and inclusion.
Directors’ and officers’ (D&O) liability insurance can mitigate ESG risks. It protects a company’s directors and officers from losses resulting from claims made against them in their capacity as directors and officers, including payment of legal expenses, damages, settlements and judgments and generally covers the company for securities claims.
Typically, D&O insurance covers claims alleging wrongful acts – errors, misstatements, misleading statements acts or omissions, neglect or breach of duty committed, attempted, or allegedly committed or attempted – by a company’s directors or officers. Claims include any written demand of monetary or non-monetary relief (which means notice to carriers is required if a demand is made before a lawsuit is filed). Coverage is usually limited to claims first made during the policy period or an extended reporting period, so long as the wrongful act occurred before the inception of the extended reporting period, whether the conduct occurred before the policy’s inception or not. Some policies have retroactive or continuity dates that may limit how far back in time the coverage will reach.
Insurers may assert exclusions apply to bar coverage, assertions to which policyholders can and should contest. First, carriers may claim bodily injury and property damage exclusions bars coverage for claims involving environmental disasters or workplace safety (though these exclusions may not apply to securities or derivative claims). Bodily injury and property damage exclusions typically require claims be made “for” bodily injury or property damage, insulating securities claims from the exclusion. Carriers may assert conduct exclusions preclude coverage in the event of a final adjudication of deliberate fraud or a deliberate criminal act including a knowing or willful violation of any law. In the event of the company or directors or officers being held liable in a final adjudication, D&O carriers may be able to recoup defense costs. Carriers may similarly assert pollution exclusions apply to all claims arising out of or attributable to broadly defined pollution and may apply to ESG claims involving environmental or climate disputes. However, D&O policies should include a securities claims carve back, and a carve back for shareholder derivative claims.
D&O policies frequently do not use standardized policy forms, so the language – and scope of coverage – may vary widely. It is important to seek legal counsel not only after a potential claim has been made, but during the underwriting, placement, or renewal process to maximize available coverage and limit the scope of exclusions.