Directors and Officers (D&O) liability insurance is incredibly common amongst business owners and is very much respected as a necessity. This insurance is essential for protecting the directors’ and officers’ personal assets, including their spouses, against any liabilities which arise in the court of their appointment by investors, consumers, competitors, or other interested parties who feel that they have suffered a loss through the director’s fiduciary breach.
As a rule, D&O insurance will provide coverage to either reimburse the company should they have indemnified the directors against their legal costs and subsequent awards decided as a result of the litigation or, if the company is insolvent, the D&O insurance will directly indemnify the directors within the conditions of the policy and subject to the primary limits.
How is ESG affecting D&O insurance and claims?
Given the nature of D&O insurance, the insurers are incredibly focused on the governance aspect of a business, as this is where the highest risk factors are likely to lie. Matters which can give risk to D&O claims include misrepresentation of company assets and operations, continuing to operate when insolvent, intellectual property theft and copyright breaches, fraud and breaching workplace laws to name but a few.
Why is corporate governance important?
By implementing a forward-thinking ESG strategy, business owners, directors, and officers can showcase their commitment to better impact our world. It also exemplifies their accountability year after year by assessing their progress and implementation of new strategies.
Over recent years, social movements have meant a more significant focus on diversity and inclusion in the workplace and the company’s management division. In the wake of specific movements such as Me Too and Black Lives Matter, many directors, officers, and companies have found themselves in unwanted situations that have led to disputes and even the dismissal of executive board members. Other areas of concern have shown problematic handling of environmental impact, supply chains and accurate disclosure surrounding climate issues.
A detailed ESG framework effectively tracks a business’s corporate governance, its commitment to recording its broader impact, and how it aims to counteract any adverse effect. ESG is now a hot topic in many businesses and is gaining more traction daily. Due to this, insurers are paying closer attention to how companies score on their ESG metrics and considering how it could be applied as a risk rating fact for covers such as D&O..
What ESG-related questions might insurers ask you?
Your insurer’s questions about ESG may differ depending on your business’s sector. Still, generally, they will want to investigate each director’s responsibilities and accountability for each ESG section.
Questions such as:
- What are your commitments to diversity, inclusion, and human rights?
- How are you measuring your environmental impact and carbon-neutral operations?
- Is your board, its directors, or officers responsible for your business’s ESG strategy?
- What does good supply chain practice look like and how do you assess and monitor this?
- How are company finances controlled? Who holds an investment in the business, how is the cash controlled and how are financial promotions managed.
These are only a few examples of how insurers will want to scrutinise your business operation to determine your D&O risk and understand more about the people in your business who the D&O policy will ultimately be protecting.
Evidencing Your ESG Commitment
Insurers will want to see evidence of your commitment to an ESG assessment and framework. Many companies are introducing green initiatives such as a paper-free workplace and work-from-home/hybrid working to minimise commutes and carbon emissions. There has also been more focus on supply chain relations and opening communication between all involved to ensure complete transparency in the production and delivery of services and products. Insurers will want to see that the board members and directors are knowledgeable and engaged in their ESG strategy and that there is sufficient training in place to ensure senior management are aware of the risks associated with such things as greenwashing.
The Wrap Up
Ultimately, insurers want your business to have as little risk as possible. As ESG has begun to gain momentum globally, it has added a whole series of factors on which your business operations can be assessed.
The directors and officers of a company are really where the book stops when it comes to these areas of concern, and they are responsible for ensuring that thorough ESG strategies are in place. They then must deliver and execute these strategies with growth and progression in mind.
It’s safe to say most business owners want to contribute positively to the world in some way, and no one wants to be in the business of being sued or facing litigation for poor practice. Like all insurance, D&O is something you should never want to use however the advent of ESG can provide a framework by which is measure performance but also a new area of exposure through which directors and officers can be held accountable. D&O liability insurance is therefore now more important than ever before to protect you and your business.
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