Building D&O insurance coverage to respond to ESG threats

As environmental, social, and governance (ESG) issues continue to grow in prominence for all companies and various stakeholders, the need for strong ESG frameworks is becoming an even greater priority for organizations, senior executives, and boards.

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Environmental, social, and governance (ESG) issues continue to grow in prominence for all companies, and for various stakeholders. As a result, the need for strong ESG frameworks is becoming an even greater priority for organizations, senior executives, and boards.

Maintaining insurance coverage can be vital to protecting against ESG-related litigation threats. To ensure businesses have the most robust coverage possible, Marsh has launched a new initiative that will recognize companies that take a proactive approach to managing ESG risks, potentially enabling them to secure enhanced terms and conditions in their directors and officers liability (D&O) insurance policies.

Stakeholder capitalism on the rise

Organizations are now expected to take action on a number of cultural and policy issues that their respective stakeholders deem important. Those that are slow to adapt to this changing mindset and the need to prioritize ESG could face a number of significant risks. These include the loss of employees, clients, and investment capital; investigations by regulators; and litigation.

This pressure to act is coming from all sides:

  • Customers are filing class-action suits against companies they allege have made false claims about the sustainability of their products.
  • Employees are choosing where to work based on how socially responsible prospective employers are.
  • Regulators are demanding more detailed disclosures on climate-related matters, diversity and inclusion, and more.
  • Investors are targeting boards of directors in litigation, alleging breaches of their duty to address ESG-related threats.

All of these threats — including litigation — can result in enormous costs for businesses and individual directors and officers.

Securing more effective D&O coverage

Although ESG has consequences for a number of insurance lines, it has unique implications for D&O insurance, which is designed to respond to shareholder, derivative, and event-driven litigation, as well as regulatory actions, among other potential threats for companies and boards.

D&O insurers are increasingly scrutinizing companies’ ESG frameworks and asking more pointed questions of risk professionals and senior executives as litigation risks and the broader focus on ESG by the investment community and other stakeholders grows. Underwriters may view more favorably those companies that can respond to their concerns and demonstrate a focus on and commitment to ESG-related risks.

Companies that engage with qualified and experienced outside counsel to review and/or validate their ESG frameworks can reduce their exposure to litigation and other D&O-related claims. That is why Marsh has worked with leading insurance underwriters and law firms to develop an initiative under which US-based companies with superior ESG frameworks can secure D&O insurance coverage enhancements typically difficult to secure in today’s challenging marketplace.

Under the initiative, attorneys from leading global law firms — including Norton Rose Fulbright; Orrick, Herrington & Sutcliffe LLP; and Paul Weiss Rifkin — will advise Marsh clients on their ESG frameworks. These attorneys can provide a variety of services, ranging from performing reviews or audits of ESG disclosures and statements to identify areas of concern, to helping companies implement comprehensive ESG frameworks and conduct board training.

Subject to underwriting — by participating insurers American International Group Inc., Berkshire Hathaway Specialty Insurance, Liberty Mutual, Sompo International, Starr, The Hartford, and Zurich North America — Marsh clients that have completed such exercises will be eligible for preferred D&O policy terms and conditions on ESG-related exposures. Among other terms and conditions, these may include more favorable pricing, policy retentions, and policy limits than are typically available to D&O insurance buyers.

In addition to enabling companies to build stronger D&O insurance programs, consultations with these law firms can help to reduce the likelihood of being targeted by shareholder activists or facing shareholder litigation. And in the event of any claim, they can allow for stronger defenses — making such companies better risks in the eyes of underwriters in the event claims are made.

Available enhancements may vary among Marsh clients and may depend on existing D&O insurance program terms. Enhancements are also requested and granted on a case-by-case basis.

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Matthew T. McLellan

D&O Product Leader

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Maureen Gorman

Managing Director