Driven by economic uncertainty, geopolitical instability and rapid technological advances, the directors’ and officers’ (D&O) risk landscape is undergoing significant change. This article offers useful insights for board-level decision-makers seeking to understand this volatile landscape.
An uncertain economic outlook
Economic uncertainty has emerged as a dominant concern for business leaders globally. A recent Beazley survey (opens a new window) shows that one in four global business executives ranked economic uncertainty as their top geopolitical and economic risk in 2024.
The years following Covid-19 have seen the emergence or amplification of a range of economic challenges. Governments’ withdrawal of pandemic-era financial support has led to a surge in bankruptcies, particularly in sectors like retail and construction. Labour market shifts, inflation and the escalating costs of energy and commodities have further complicated the outlook. These pressures are straining corporate resources and increasing the risk of D&O claims, particularly in cases of financial distress or insolvency.
For boards, this underlines the need for robust scenario planning and contingency strategies. Preparedness is not just a matter of ensuring organisational resilience. It is also critically important to improving your risk profile and influencing how your organisation is viewed by underwriters. Companies that can demonstrate proactive risk management are best positioned to secure favourable terms at their D&O renewals.
Geopolitical instability and shifting regulation
Global tensions, from trade disputes to national elections, are layering complexity on an already fraught D&O landscape. Trade tensions have disrupted investment strategies and supply chains, delayed IPOs and constrained capital-raising efforts, further exacerbating financial vulnerabilities. A record year of elections, in the US, the UK, France and India among many others, are introducing fresh regulatory uncertainties with potential knock-on effects on trade policy, economic stability and consumer confidence.
Boards need to consider how a raft of resulting changes are likely to impact their operations. Understanding regional indemnification provisions, ensuring appropriately structured multinational insurance programmes, and maintaining clear claims protocols are essential steps in mitigating risk.
A rising tide of insolvencies
Insolvencies are on the rise globally, with more than two thirds (67%) of defence counsel surveyed in the Inigo 2023 Defense Counsel Survey (opens a new window) saying they have seen an increase in bankruptcy filings. This trend has significant implications for D&O insurance, particularly in relation to Side A coverage, which protects individual directors when a company cannot indemnify them.
Senior executives need to review the structure of their D&O policies on a regular basis, ensuring that these continue to make appropriate provisions for both company balance sheet protection and robust Side A coverage. Companies should conduct scenario-testing, considering varying regulatory environments and potential claim triggers, to provide a clear roadmap for handling claims in real-life scenarios.
Climate-related risks and the challenge of ESG
Environmental, social and governance (ESG) factors are reshaping the corporate and insurance landscape. Scope 3 emissions, which stem from supply chains, present a significant challenge for companies striving to meet climate transition goals. This is particularly the case given widespread concerns around the reliability of data supplied by supply chain entities. Meanwhile, regulatory scrutiny of greenwashing is intensifying globally, with notable cases brought recently involving securities claims and substantial damages.
Boards need to integrate climate-related risks into their strategic planning. Accurate data collection, scenario testing and transparent disclosures are critical to addressing both regulatory expectations and stakeholder concerns. Highlighting how a board oversees and communicates ESG challenges, rather than simply detailing what actions are taken, can bolster credibility with insurers and investors. Focusing less on lofty longer-term ambitions that may be dependent on technologies not yet generally available, and more on shorter-term practical deliverables can be looked upon favourably by underwriters assessing a board’s exposure to ESG-related lawsuits.
The rapidly evolving nature of ESG litigation underscores the need for continuous adaptation. While US-based defence counsel have noted fewer ESG-specific claims, regulatory changes like the Securities and Exchange Commission’s (SEC) new guidelines indicate increasing scrutiny. Boards need to keep themselves well-informed on current and future regulatory developments, particularly in regions like Europe and California, where more demanding sustainability reporting standards are emerging.
AI: a disruptive force
Artificial intelligence (AI) is transforming almost every industry and emerging as a potentially significant driver of D&O claims. Allegations of AI washing, where companies falsely claim to be using AI (or exaggerate their claims) to boost investor confidence, have already led to securities class actions and regulatory fines. The operational risks associated with AI, including data privacy breaches and decision-making errors, also amplify potential liabilities.
Staying competitive requires embracing AI, but doing so without proper governance can lead to reputational damage and legal exposures. The many ways in which poorly planned or executed AI use could come back to harm[DS1] an organisation have yet to fully come into focus. But these are likely to include:
Flawed decision-making based on input from AI, with its now well-recognised propensity for ‘hallucinations’;
Inappropriate use of open-source AI tools; and
The risk of data privacy breaches or leakage of intellectual property (IP).
Establishing specialist committees, recruiting board members with genuine AI expertise and carefully documenting governance processes are all essential steps in mitigating risks. Communication is equally critical. Boards should be able to articulate clearly how AI is integrated into their business strategies, emphasising benefits like cost savings and enhanced efficiency, while fully addressing operational and compliance risks. Transparency with regulators, insurers, investors, and other stakeholders fosters trust and demonstrates accountability.
Emerging legal trends
A marked recent rise in collective actions, particularly in the UK and Europe, represents a significant shift in the legal landscape. An increasingly active litigation-funding sector and rising settlements are placing new pressures on D&O policies. Combined with escalating legal fees, these trends could lead to a rise in claims that erode multiple layers of coverage.
Boards need to anticipate these developments by strengthening governance frameworks and ensuring adequate policy limits. Collaborating with insurers to refine claims protocols and align on preferred legal counsel can streamline the response to complex claims. Regular reviews of policy language and triggers will also help address gaps and ambiguities that could subsequently complicate claims.
Recommendations
Corporate boards face an increasingly complex web of risks. Economic uncertainty, geopolitical instability, ESG challenges, AI disruption, and legislative and regulatory developments all demand focused attention and strategic action. Proactive engagement with underwriters, robust scenario planning, and transparent governance are key to mitigating these risks.
Investing in expertise, whether through external advisors or board appointments, is critical to addressing these emerging challenges. From navigating climate-related disclosures to managing AI risks, the ability to adapt and innovate will make the difference between more and less effective corporate governance in the years ahead.
With foresight and resolution, and the right insurance partners, boards can effectively safeguard their organisations and senior managers, while maintaining resilience in a rapidly evolving landscape, addressing current risks and anticipating the challenges of tomorrow.
For further information, please visit the Lockton Management Liability page (opens a new window).
