Pendulum swings causing emerging D&O risks, panel says

NEW YORK — New risks in directors and officers liability coverage are emerging from artificial intelligence, executive orders calling for rollbacks in initiatives for diversity, equity, and inclusion, environmental, societal, and governance, and companies considering reincorporating outside of Delaware, a panel of experts said Wednesday.

During a session at the Professional Liability Underwriting Society D&O Symposium moderated by Beachwood, Ohio-based Kevin LaCroix, the executive vice president of RT ProExec, panelists said rollbacks of DEI and ESG initiatives can potentially cause a spike in securities class actions and regulatory and enforcement actions from government agencies.

The rollbacks could also lead to “a new brand of litigation” containing allegations that could impact both D&O and employment practices liability policies, said Adam Ziffer, a New York-based insurance recovery partner at Cohen Ziffer Frenchman & McKenna LLP.

“One of the challenges I think we’re going to see are that the cases aren’t the ‘up the middle’ stock drop cases on the public company side,” he said.

Public companies that remove the initiatives could be at an increased risk of inadequate disclosure claims from shareholders, and private companies could face unfair trade practices lawsuits, said Jennifer L. Odrobina, senior vice president and head of financial lines claims at Sompo International.

She said companies should take a step back, not make drastic changes and think about how any changes are disclosed.

Companies should also be aware that existing discrimination laws are still in place, said Larry Fine, the management liability coverage leader for Willis Towers Watson PLC’s FINEX North America division.

The panel said the emerging trend of companies considering reincorporating their businesses outside of Delaware to states such as Nevada or Texas could also create D&O risks.

Underwriters should consider the risks when a company is considering reincorporating in a different state and know the rules of that state, Ms. Odrobina said.

One of the main benefits of Delaware, where two-thirds of Fortune 500 companies are incorporated, is a consistent, fast and predictable court system compared to Nevada and Texas, where the courts have less established case law.

Texas, which launched its own business court system last September, is likely to rely heavily on the corpus of Delaware case law, Mr. Ziffer said.

The main benefit of Delaware courts is its 90-day rule for issuing a ruling after a motion is fully briefed or argued and that judges are receptive to working with counsel on litigating claims, he said.

As AI use continues its ascent, it will be an exposure for companies and become part of their risk profile, Ms. Odrobina said.

She said the insurance industry needs to think about AI and aggregated risk and that companies should categorize how they use AI.

According to a report issued by Cornerstone Research, the number of securities class actions involving AI doubled last year compared with 2023.

Future lawsuits involving AI could arise from an evolving regulatory landscape, understated risks and failure to monitor, the panelists said.

While AI is not likely to create any major coverage issues, Mr. Fine said he has seen some insurers adding clarifying language to D&O policies and coverage provisions for rules coming out of the European Union on AI use.

Mr. Ziffer said AI could unexpectedly affect the D&O space by making litigation more effective and less costly.