50 Predictions: Directors' & Officers' / Financial Institutions
Published 1 September 2015
Making predictions about the future of the insurance market is not for the faint-hearted. Our experts have boldly looked ahead at the challenges you may face over the next year and produced 50 focused predictions.
Class actions may be coming to the UK
US-style class actions have not yet reached Europe, although steps are being taken to make it easier to bring collective actions in several member states. Barriers to group litigation are also gradually being eroded in the UK. Examples include the Consumer Rights Act 2015, which introduces opt-out class actions for the first time, and the £4 billion shareholders group action against RBS’s former directors, issued in April 2013. Both of these types of collective proceedings are currently limited to certain causes of action but they may be indicative of wider changes to the UK litigation landscape. This could have significant implications for directors’ & officers’ (D&O) and financial institutions markets.
Claims are more likely in the wake of deferred prosecution agreements
The introduction of deferred prosecution agreements (DPAs) will increase the risk of claims against directors and officers in the UK. The increased risk arises from the likelihood that, after a DPA has been entered into by the entity, individual prosecutions will follow. Standard D&O wordings will respond to the defence costs and expenses related to such prosecutions, but questions will arise as to whether a circumstance notification can or should have been made once a DPA was under negotiation or approved by the court.
In the US, plea bargains have encouraged prosecutors to bring cases in the expectation that, with the right pressure, even hard cases can produce a win for prosecutors. The Serious Fraud Office (SFO) has now issued its first invitation letters giving firms the opportunity to enter into DPA negotiations and it is currently working with those firms. Therefore, we predict more cases will be brought and a consequent increase in notifications to D&O policies, provided the SFO is given sufficient resources to pursue cases, which has been an issue for it in recent years.
Whistleblowing and associated policy issues on the up
The UK authorities are actively encouraging a culture of self-reporting and whistleblowing. The costs of internal investigations could be significant and may not currently be covered under D&O policies. Typically only the costs of a formal or official investigation attract cover. Increases in regulatory claims are also likely to follow suit. Whether an admission of misconduct in a whistleblower report or a settlement with the regulator could trigger an exclusion under a D&O policy will depend on the specific policy wording, the process surrounding the admission and how it is phrased. Insurers and insureds may wish to revisit wordings to ensure the correct level of cover is provided.
2015/16 may see a hardening market for D&O
The Petrobras scandal seems to grow in magnitude with every passing day and across the globe the outlook is for an increasingly regulated business environment. Recent years have seen a perfect storm in the area of D&O/financial institutions liability: the forex, LIBOR and payment protection insurance scandals, as well as an increase in enforcement activity, all of which have driven increased demand for cover. However, this has not translated into a hardening of rates to date, and broad cover and overcapacity have been a part of underwriters’ reality. As the economic recovery gathers pace and capital finds better returns elsewhere, perhaps a reduction in capacity will bring a hardening market.
Key developments in 2014/15
- Consumer Rights Act 2015
- Small Business, Enterprise and Employment Act 2015
- Jetivia SA and another v Bilta (UK) Ltd and others
- R (on the application of Bluefin Insurance Services Ltd) v FOS
- SPL Private Finance IC Ltd and others v Arch Financial Products LLP
- Versloot Dredging BV and another v HDI Gerling and others