D&O: Certainty in an uncertain environment

Review how higher interest rates, lack of profitable investments and other current business trends could trigger D&O coverage.

Higher interest rates, lack of profitable investments, less economic activity and foreign currency exchange fluctuations are all challenges that put strain on a company’s balance sheet and could lead to lawsuits against the company and its directors and officers. (Credit: rawpixel.com/Adobe Stock)

Over the past decade, the Federal Funds Rate has consistently stayed below 2.5% and near zero from January 2009 until January 2016. The COVID- induced crash of February 2020 once again brought the federal funds rate near zero until early this year (prime interest rates are generally 3% higher than the Federal Funds Rate).

These last few years of easy monetary policy led to a low interest rate environment and an unprecedented amount of borrowing. This borrowing, however, has led to investment, research and development and innovation. Without the ability for businesses to borrow at low rates we would likely not have the same amount of capital deployed towards new ideas and the betterment of our society. We can now hail a taxi with our phone, wirelessly listen to any content at the touch of a button and stay anywhere in the world without going through a hotel. Investment leads to growth and we have a clear gauge of GDP growth over the last decade, nearly 53%.

Pandemic-related fiscal and monetary stimulus, supply chain disruptions, and the Russia-Ukraine conflict have fueled inflation over the past year and a half. This pushed the Federal Reserve to raise interest rates at a pace not seen since the early 1980s.

Higher interest rates, lack of profitable investments, less economic activity and foreign currency exchange fluctuations are all challenges that put strain on a company’s balance sheet and could lead to lawsuits against the company and its directors and officers (D&O). For example:

Claims brought by shareholders/lenders: In the event a corporation’s liquid assets are held in long-term bonds at low rates, the opportunity cost might be large enough for allegations of a breach of duty with respect to how the directors and officers managed the finances. Breach in the duty of care can also include not selling an unprofitable portion of the business and/or missing good investment opportunities, especially if competitors are making investments.

Misrepresentation: These types of claims can arise due to inadequate or inaccurate disclosures when reporting financials. Creditors can allege loans were made based on inflated financials and they would have never made the loan otherwise. Claims can also arise from allegations of misrepresentation, and inaccurate or misleading information about the company to investors.

Mergers and acquisitions: Companies often engage in mergers and acquisitions, and exposures can arise as a buyer or seller. Claims from past creditors or vendors, disgruntled shareholders, or allegations of failing to perform an appropriate amount of due diligence are all examples of potential claims. As mentioned above, allegations of misrepresentation or misleading statements about the company’s market share or financial health is another potential scenario that could arise from either side of a deal.

Claims brought by employees, customers, vendors and competitors: Anything ranging from harassment and discrimination to false advertising, patent infringement and antitrust violations are all commonplace exposures. Current employees are not the only source of claims against a D&O. When a company hires a new employee there is potential for a suit brought by a competitor. Competitors often bring claims alleging the former employee took sensitive data or trade secrets that would give his new employer a competitive edge.

Leonid Kanopka of Marsh McLennan Agency (Southeast). (Credit: Courtesy photo)

Today’s macroeconomic backdrop is not the same as it was a decade ago. Economies across the globe are beginning to feel uneasy, unsettled, or uncertain. D&O insurance is a financial tool to help directors and officers feel more confident in their decision-making and help provide certainty, especially in times of uncertainty.

Leonid Kanopka has over 10 years of experience in risk analysis and underwriting in the insurance industry, currently serving as vice president of the executive liability practice for Marsh McLennan Agency (Southeast).

Opinions expressed here are the author’s own.

Related:

 

Recommended Stories