Private Directors & Officers (D&O): Hot Topics and Emerging Risks

Paul Lucas  00:00:00

Hello everybody. Welcome to today's webinar with Sovereign Insurance looking at Private Directors and Officers insurance hot topics and emerging trends. I'm Paul Lucas, Global Editor and Insurance Business, and I'll be your host today as we explore the latest developments in directors and officers liability for private companies. Now, whether you're a broker, Executive Risk, professional, novice or expert, this webinar will equip you with the knowledge to navigate today's complex risk landscape. Now, before we begin in earnest, a few housekeeping notes to run through. If you need any technical support during this webinar, please use that Q and A box at the bottom of the screen. We do have a team on hand to help you with any issues. We would also love to hear your feedback on the poll questions which will be presented throughout this discussion, so be sure to participate when prompted. And last but not least, the webinar recording will be made available to all attendees after the event, so if you have any distractions during the live feed, don't worry, you will get another opportunity to watch it back now, at the end of the presentation, there will also be a question and answer session, as I alluded to at the top. So be sure to type any questions you have into the Q and A box at the bottom of your zoom screen. Remember, the more feedback that we get, the more we know about the issues and concerns that you have around the D&O space. So please engage with us today using that Q and A function so we can point you in the right direction. Now, back to the subject matter at hand. Liability for directors and officers is, of course, transforming at an unprecedented rate, with organizations now stirring down the barrel of heightened scrutiny and ever new exposures in the face of these shifting market conditions and regulatory upheavals, not to mention emerging risks, keeping your eye on the ball is crucial. So for brokers and risk professionals, it becomes an issue of understanding that rising complexities of D&O coverage because any lapses could result in hefty fines and painful court battles. So with that in mind, this webinar will go in depth on the D&O market, including the significance of D&O coverage and why it matters more than ever, current market conditions and the impact on pricing emerging risks shaping the private company, space, real life claims, examples, practical strategies for risk mitigation and protection and more. And to meet our guide today, we've turned to a true expert in the field. Eduard Lecker is a seasoned senior management liability underwriter who has been a part of srin since June 2023, with over 10 years of experience in the insurance industry and a CIP designation, Eduard has worked on both the broker and insurer side of the business. So let's get started, shall we? And Eduard over to you.

 

Eduard Lecker  00:02:40

Thank you so much, Paul. That was a great introduction. I don't think anybody could have introduced me better than that. So hello everybody, as Paul mentioned, I'm Edward Lecker. We're going to start talking about the topic at the hand, which is navigating the current landscape of the D&O market. So we've introduced me on the presenter. Edward Lecker, as Paul mentioned, and I, I think it bears repeating. So I used to work on the broker side. Now I'm on the insurer side. I've been in the industry, I think 13 years, been all over the place, so I have a good understanding of what the broker is looking for, what the underwriter is looking for, what the client is looking for, because on the brokerage would work with the clients directly. So which is, when I set about to do this presentation, is really what I wanted to accomplish is I didn't want to get too much into the specifics of it. I want to give everybody a good idea, and I want to be enjoyable for everybody, or educational at the very least, if not enjoyable. So with that being said, the first poll questions, if you can just humor me. It was just for me to know. How would you rate your D&O knowledge? I think the poll should be coming up on your screen right now. Pretty much you know nothing. You're a beginner, you're an expert. Maybe you you want to do this presentation for me, or you're in a medium somewhere in there that will allow me to, you know, sort of alter how I do this presentation. Because if I see there's a lot of beginners or people that know nothing, of course, I can go into a bit more details. If I see everybody as an expert, we can probably just call it a day today and go out for a coffee or drinks whenever you want. So go ahead and answer, and I will wait for the poll results. You

 

Eduard Lecker  00:04:26

all right, okay, so, right, good, okay, so I see so people that know nothing about D&O is about 6% beginners, 44 moderates, 47 and nobody. Well, only 3% people think of themselves, experts, okay, all right, so that's a good idea. That's kind of around what I was expecting. So we can get started. So we'll be talking about today the significance of the D&O coverage, the current market conditions. What are some emerging risks we're seeing in the market? We'll give you some claims examples, and of course, we'll give you some ideas of what to do with those claims, how to mitigate against the risks. Okay, so I know you just did a poll, but I will start with another poll question, just because, like that, I'd like to keep you on your toes in the beginning. So who do you think needs D&O coverage? So do you think it's private companies, only, nonprofits, publicly traded companies, or all of the above? So you can put in your answers there.

 

Eduard Lecker  00:05:22

There's no right or wrong answers except the incorrect ones, of course.

 

Eduard Lecker  00:05:37

All right, I see some results coming in. All right, perfect. 99% of 99% of you have answered all the above. Good job. I don't know who the 1% is. I thought it's only private companies, but yeah, it's good to know. So who needs D&O, everybody, any company that operates out there, would need D&O, private companies, nonprofit companies, publicly traded companies. Everybody needs D&O. We all know that here, because we're in the insurance world. But something to bear in mind, not everybody that we talk to is in the insurance world or it doesn't think the way we do, right? They look at insurance as more of a premium as opposed to what it provides. So what is the significance of D&O coverage? Now, when I started this presentation, the reason I started is because I noticed that a lot of clients and even brokers sometimes would say, well, they're a private company, they do not need D&O insurance, or it's very unlikely that they would need D&O insurance. So that's sort of the reason behind the presentation. Just to give you a little idea of why I created and it's absolutely not true, private companies are just as vulnerable to D&O claims as publicly traded companies. I know a lot of the big one would say, Well, it's a small company. It's family owned. Why? Why should they get D&O coverage? They're never going to be a dispute. And I remember saying to the broker, well, I mean, if you ever dealt with a relative dying and dealing with inheritance and an estate battle, you see how much issues can come with an estate battle, you can say that to the client. Why do you think that in a business where more money is involved, there's not going to be any issues? So it's definitely the same risks are used by private companies as they are by public companies as they are nonprofits, albeit they'll be a little bit different. Of course, there's different nuances, but the risk is there, right? And if the risk is there, we have to cover that exposure. So I just want to do a quick overview of D&O insurance. I'm not gonna get too much into detail, because, again, it's not the nature of this presentation, but just for people who are not too familiar with it, I can give a rough idea of what it is to cover, right? So D&O insurance usually is broken to side A, B and C, Side A would cover the personal assets of the directors, which a lot of people aren't aware of, because when you have a corporation, a lot of people are in the impression, well, I can be personally liable. The corporation is its own entity. That's the only entity that you can sue. I'm free in the clear. That's why I started a corporation. Not necessarily the case, not at all the case, I should probably say, because the personal assets of the directors and officers of the company could be held liable. So if there's a suit, they can sue the director personally, they can sue the company and so on so forth. They can sue anybody, essentially. So what does side a cover? It covers the personal assets of the company's directors. Side B and C essentially covered the company. There's a little bit of a difference between them, but essentially they covered the company itself, the corporation, under a D&O policy, sometimes referred to as management liability, you also have Employment Practices Liability, which will cover the directors and officers and the company for any employment issues. So that's your wrongful dismissal. An employee feels bad that they were dismissed. They're suing the company, potential harassment cases, things of that nature fall under there. And the last thing is breach of fiduciary duty. So that's usually for orchestrating, administering the pension and benefits plan. If something happens there again, the directors and the company could be held liable for that. Now, what are the benefits? Of course, I told you what it is, but why should you care? And why should your client, or why should the broker care offer it to the client? So the biggest thing is it protects against legal risk. So as I said, the exposure is there. You can be sued for anything. It could be the bankruptcy of the company, and they said you did not run this company correctly. I'm holding you personally responsible. I'm not holding the company. I'm holding you personally responsible, and they'll go after your personal assets. Now the biggest thing to see with insurance is, why do you actually need it? And a lot of times people say, Well, we have to get it by law. We're contractually obligated, which is the last point there compliance and corporate governance. We need to get it. Somebody's requesting it. But another big one is for attracting and retaining leadership. And good talent. Now if I want to sit on your board, and I'm an expert in my field, I will not accept the fact that you do not have D&O insurance, and the reason for that is my personal assets can be brought into question. I don't want to lose my house because the company went bankrupt, right? So any sort of good leadership position, any person wants to sit on your board is going to want that, and you have the financial stability and business continuity, essentially, for that, pretty much when you have property insurance, everybody understands that. You know, if the house goes down or if the building burns to the ground, I can't afford to fix it, and I can't afford to put $2 million aside to fix the building should it burn down to the ground with liability coverages, and you know, is included in that. It's harder to see. It's more abstract. So what I like to say is similar to that, whereas you get property insurance, you get a building insured, because you're not going to keep $1,000,000.02 million dollar in the banks in case this building burns to the ground or anything happens to it, you want to use that money for other things, like marketing your business, growing your business, things of that nature. Same with D&O. You're not going to keep $2 million in case, you know, an employee sues you, a shareholder sues you, or anything like that. There's a class action lawsuit against you. This allows you to free up those funds for a premium, essentially, right? Like all insurance. So as opposed to keeping $2 million for a D&O policy, you can pay the 5000 $6,000 whatever it costs, freeing up those other funds to allow you to grow your business. All right, so let's dive into the current conditions of the market. So the D&O market has seen quite a bit of turmoil, a lot of ups and downs in the last, I would say, four to five years. A lot of it is, of course, COVID related and other issues as well, where you can say historically low pricing and things of that nature. So it has significantly evolved. I think a lot of when COVID started in the 20 and 2020 in the 1920s there was a lot of panic, I would say rightfully so, not just in the D&O market, but everywhere. Because it was, you know, unprecedented times, I think, is what the buzzword was. And insurers, brokers, clients, nobody knew what was going to happen. So insurance companies were usually very reactive. We're not really proactive. I mean, the idea of insurance is we look at the claims history, so we have to react a certain way, or react some happens. So we thought there's going to be a lot of claims, COVID, for D&O, specifically, lots of people losing their jobs, layoffs, people losing their jobs, EPL claims, employment practices, liability claims, that was the big concern. Also potential for the directors to be held accountable for doing something wrong during that time, like you didn't do your job properly. This is why I think it's not COVID So there was a lot of uncertainty in the market. Now, over the last two years, we've kind of noticed that that reaction that we were expecting, and when I say we, I mean insurance as an industry, we're expecting for D&O, then, wasn't really manifesting. It did not really have that impact on D&O claims as we thought it was. It kind of remained almost identical. So there have been, of course, claims related to COVID, but it hasn't been as much as the world is burning. Everything is on fire, sort of thing. So we've noticed that it started as a hard market because of COVID, 2020, and up to 2022, and then it kind of fizzled down a little bit. And now we're kind of seeing a soft market. It kind of started last year. We're seeing that insurers are willing to take more risks. There's more demand to come in. They're willing to provide better pricing and things of that nature. So pricing, whereas during COVID, I remember when I started during COVID, I would put an increase of 20% and that was for a good, clean account that had no issues with it. If there was problems, of course, will be higher. And to my surprise, I was thinking I'm going to get some broker pushback. And it was sort of, yeah, go ahead. I'm good. Thank you. Thank you. If it's only 20% you're my favorite underwriter today. Nowadays, of course, it's not going to be that anymore. Now, that being said, we're still higher than when we were pre COVID prices overall, an individual accounts. Of course it could differ, but if we were, let's say, if you can see my camera were over here, of course it went very up, and now it's kind of going down again. Since we've kind of seen that, there's been no impact. The market is competitive. Like we said. It's softening. So many insurers are trying to go in. They're increasing their capacity as well. So if maybe you only wanted to go provide $2 million on the risk as far as insurance goes, now we want to do 5 million. Another thing that happened during COVID. I know that a lot of ten million policies shrunk to $5 million policies, so the brokers had to go and get access coverage somewhere. But now I'm seeing a lot of companies saying, Well, no, we'll take the four. Old, 10 million will take more. Because why not? It's premium for us. We need the money. We want to grow, and it's not that much risk as we originally thought it was. So that impacts organizations and impacts the insurers, impacts the broker, right? Because you know, you're dealing with the client. The client could shop around another broker. Can go to another insurer who wants to take the whole the whole risk, or even just write it for a better price.

 

Eduard Lecker  00:15:26

Now we have some economic factors, of course, that are impacting the market as always. Inflation is always going to be there. And for D&O, specifically, it's the cost of any sort of lawyers, mediators, things of that nature, the price for them is never going to go down. So I think you can say that inflation is always going to be there, and it's always going to be alive and well, and costs are going up. Even the cost for an hour for a lawyer is going to go up from what it was five years ago. So think about that. If we're covering defense costs as an insurer, our costs are going to go up. But as I mentioned a few seconds ago, the pricing is going down, so it puts us in a little bit of a weird situation, right? There is, of course, market volatility, as always, you know, with cross border risks and everything else. I mean, we have a new leadership in the US, which is impacting some sort of cross border risks. You know, one day there are tariffs, the other day they aren't tariffs. And that impacts your clients. It impacts the insurer. It impacts consumers. It impacts everybody, right? So we're not we're not able to ignore it. It's something that is happening right now. So let's dive into some emerging risks, and what are something that are specific to D&O, that are happening, that are interesting, and I thought that to bring it to your attention, all right, so cyber is definitely a hot topic issue, and we can kind of see how many cyber attacks have been happening recently. I know when I was still fairly new in the industry. Cyber was pretty, pretty, a fairly new coverage where a lot of people didn't know about it. They're like, well, I know somebody, you know, hacks into my system and everything like that. Since then, there's been a lot of big cases. I think even Sony and big companies had cyber attacks where people have stopped their system. You stop them making money, or your private information gets out there. There's been a lot more scrutiny towards it and COVID to bring it again with, to bring it again with people sitting at home all the time, everybody working on their computers at home. Exacerbated, of course. So now cyber is definitely front and center. And think about even for your own personal reasons, how many phone calls, fake emails, fake text messages you get from, you know, CRA telling you you owe money or you want a prize or something like that. So if you as an individual are getting so many calls, how about a company that has a lot more assets and a lot more money and a lot more people working for it, think about in that respect, right? So we must take cyber security threats seriously. Now, what does it have to do with D&O? Is if you have an organization, it's open to cyber crime. It's open to cyber security threats of all kinds. What are you doing to stop them? Now, if my private information got out there, I might not take any legal action, but you know, if 10,000 people decided to start a class action lawsuit and said, Well, you didn't do the proper procedures, you didn't do the research, you didn't set up systems in place, does that open your company for an exposure? Yes. So that's something that as directors and officers of a company, you have to look at. There's no option around this, right? Whereas 10 years ago, it would have been like, Well, yeah, we should look at it, but now it's absolutely mandatory, and you're going to be held accountable for it, since you have a duty to your clients to hold their private information safe, and like I said, you have to hold it, and directors can be held personally accountable for it, not just as an organization, and the regulatory environment has changed. You have to put some things in place, not just for your clients, but legally. You have to put things in place, and if you breach those again, you're open to claims and things that happen now the regulatory environment. I'll keep on saying it throughout. It's a nice thing to say to somebody that say you have to do it by law, but is that really adding value to our clients to say, well, you have to, because if they didn't have to, they won't do it, right? So I will be mentioning from time, but there is legal requirements. But the point I like to sometimes get across is, don't just say you have to do it, or you need to make the clients understand why they need to, why they need to, why that legal requirement is there in the first place, because as soon as that legal requirement goes away, they're not going to do it, but they're still open to the same exposure or a different type of the exposure, still open to an exposure there, just because legally, they're not allowed to do it. All right, similar to cyber, we have aI which has been a very. Very hot button, hot topic, hot button issue, whatever you want to call it. So a lot of things that come out about ethical AI practices. So to give you an idea on that, is essentially a lot of AI doesn't create something new, per se, what AI does? It sort of accumulates information that's already available. So let's say everybody has gone to chat. GPT, I'm pretty sure at this point, and you want to say, Okay, give me a picture of, you know, a coffee cup dancing on a skateboard, whatever it is, right? And it brings you a picture of a coffee cup dancing on the skateboard. Now, that coffee cup was not drawn by AI. It took something from the internet and condensed, it took something from the skateboard. And things like that. Now these are all intellectual properties, intellectual properties, right? So a lot of artists are having issues with it. I know that specifically in that realm, that companies using AI to make something, well, it's technically not yours, but a part of it is yours. In a similar situation, if you have to, you know, make a presentation for D&O, as I did. I used the Microsoft Copilot to be honest, and I said, Make me a presentation. These are the topics, and it's built out a presentation. Is it the presentation you see here today? No, of course not, because some of it was wrong, some of it had issues, and other things like that. But I also couldn't just take somebody else's work and put on mine, you know, it gave me an idea on the format, gave me the idea of what to talk about, but I had to put in my own information there. Now companies are putting things out forward with AI that, you know, could have some intellectual property assigned to it that's not theirs, where it's hidden through AI you're not going to even know. So that opens you up to some risks there. Another big thing that's happening is AI washing. That's a fancy term to say that you're overstating essentially, the ability of your AI. So you're saying we have the greatest AI software out there in the markets. It's going to tell you exactly what markets to hit. It's going to collaborate all this data, and it's going to do all these amazing things. But in reality, it doesn't really do like I can give a personal example. So recently I went to Japan, and like, everything you Google everything, what you need to know. So I wanted to know what sort of power outlets they use in Japan. I Googled, what power alphas does he use in Japan? And if you know now, if you use Google, you get a little bit of AI chat box that kind of summarizes the information for you. So I must have typed the question four or five different ways, and it says you cannot use North American power supplies in Japan. Lo and behold again Japan, the first plug I see is the same plug that we use over here. Now I went and bought and, you know, universal power supply for $30 on Amazon, and that was just money that I didn't need to spend on. I could have brought things I brought from home. Why did I bring that? Example is okay, you know, here is a case where AI misinformed me as a consumer, made me purchase something for $30 now I wouldn't do anything with that information. I wouldn't sue anybody for $30 I just forget about it. But you have investors, you have shareholders, you have employees, you have everybody, all the stakeholders of organization. If you have an AI software tell you to do something that causes somebody that gives wrong information, and causes somebody to, you know, lose not $30 but $30 million how much more likely are they to sue you at that point? Right? So that's something to keep in mind. And these things have been happening even in the US, not too much in Canada that I've seen, but in the US, there's a couple of companies right now that are actually currently in litigation because they said this, AI will do this, and it wasn't able to deliver what it promised. So that's a interesting risk that's really emerging right now in the field and regulatory compliance, like I always said, like, gonna kind of gloss over it, because if you have to, you have to, sometimes you have some sort of regulation that will come with it. For AI, we still are fairly early. There's some regulation, but I expect the next five years definitely gonna be a lot more regulations for everybody to know about.

 

Eduard Lecker  00:24:19

Next is corporate social responsibility. I mean, it's always been there, but of course, it's been affected so supply chain management. Whereas during COVID, we had an issue where we cannot get our goods because there was issue with the supply chain. So getting things from China over to here or from anywhere was an issue. Now you see a little bit more of a trend, especially with the new leadership in the US by Canadian, by Canadian, by Canadian, right? So what does that mean? We have to label our products to say this is Canadian or not Canadian. And some products are easier than others. You know, some products are, you know, made somewhere, assembled. Here. How do we label it so people will know? Two years ago, I don't think anybody would have cared, or maybe somebody would have cared. A small percentage would have cared to say, like, Well, I wanted to be completely Canadian. I don't want it to come from the US, for example. Right nowadays shifting a lot more people are looking at it, and there has been a lot of conversation about how our labeling is not that great again. I mean, we have standards. But for example, if you're producing apples right, sometimes you get or some apple sauce or something like that. You can use Canadian apples, but when it's not in season, you might go to somewhere else in the US. Again, two years ago, didn't matter. Now it's a big deal for people, so that's something to look out for, diversity, equity and inclusion also. Again, new leadership in US has been talking about it to death, I mean, has been a focus for a while, like I would even say 10 years ago, most companies didn't have a procedure to deal with, you know, they will have somebody for disability, handling people with, you know, all genders. And now there's a lot of focus on LGBTQ community. So now it's kind of how we say. It's very common to see that it's pretty much, you have to have that as part of your employment practices, where it wasn't before, where it's going. Now, it's kind of odd. The reason I brought it up here is because in the US, you see a little bit less of a focus on that. Now, how is it going to affect Canada? We don't know. Again, we're in Canada, we do have a lot of insurers that you know are not Canadian owned. So how will they handle it? And then if your US head company puts in some dei procedures in place you might not agree with. Come to Canada. What's happening? Something to watch out for, not just for insurers, but also for companies operating Canada with a US parent company. All right, environmental and social governance, similar to that. Again, climate change litigation has been going around pretty big in the last couple of years. Remember, I mentioned AI washing. There's a similar term for the environment called green washing, essentially overstating what you're doing environmentally, like you're saying we're recycling 100% of the products, but people find out you're recycling only 20% of them, right? That opens you to litigation because you're misled or you exaggerated the consumer now, again, with the changes in the leadership down south, of course, they're looking less into environmental and climate change sort of action. How is it going to affect Canada? Interesting to see. If I had a crystal ball, I will tell you, but I don't know what the future will bring. But just the point to say here, this is still something that's very important. You could be held liable for, you know, anything, pollution, polluting things, or not doing as much as you said you would. Not even just not doing anything, but not doing as much as you promised. All right, so to give you some claims examples, I gave you some idea here. Now these are not real companies that I changed the names for, but these are claims that have been happening. And I just kind of want to give you a real life example so you have an idea on you know what to look out for, or what to tell your own clients when you look at it. So before we start there, what do you think is the most common D&O claim? There's another poll for you, which allows me to Drink some water. I

 

Eduard Lecker  00:28:51

Okay, answers are coming in. I

 

Eduard Lecker  00:29:07

Okay, so let's see. So we have employee issue, 52% breach of fiduciary duty, 34 corporate social responsibility, five and theft of intellectual property, eight. So yeah, we have a smart group here. I think you all lied to me in the beginning to say that you have a beginner or moderate knowledge. You're all experts here. Every poll question you got 100% correct. So you know, applause for you. Yes, employment issues are the most common claims. So when we talk about insurance, there is a frequency and severity. They're not the most severe claims, but they are definitely the most frequent claims. Again, lots of employees, lots of employees being laid off, things like that, make it the most common issues. All right, so let's put an example here for cyber security. I'll read it out loud. ABC, corporations, IT department. Detected unusual activity within their network. Subsequent investigation revealed that a sophisticated cyber attack has compromised the company's security systems, allowing hackers to access and steal sensitive customer information. The breach was traced back to a vulnerability in the company software that had not been patched despite known risks, very common thing that's happening nowadays. What has happened? Financial costs to the company associated with notifying consumers, legal fees, regulatory fines and loss of revenue due to the system shutdown. Reputational damage led the customer trust in ABC corporation to reduce negative media coverage, led to reduce revenues and investor interest, legal proceedings, followed with the class action lawsuits and regulatory investigations. So you see something like that is definitely real. Many companies have faced that. Many companies are open to that risk, and we're far behind. The point to say, well, we we didn't know about it, or we aren't aware of it. It's your duty and responsibility to your clients to know. Now, ABC corporation could be something that sells you video games, or it could be something with your private health information. If it's your health information or anything else that you hold dearly a lot more than maybe just your credit card that you can cancel, you're going to be a lot more likely to be upset. You're going to be a lot more likely to sue and follow litigation for it. All right? So the claim I can say here the CEO was held accountable for the company's cyber security practices. The claim for D&O coverage included defense costs, including the legal proceedings, settlement amounts for the class action lawsuits, costs related to regulatory fines and penalties, expenses associated with crisis management and reputational damages. So as you can see, the D&O coverage help assist, cover the loss. So now the director himself was held personally liable. Did not have to pay everything out of pocket. Ai, Cy K Corporation face a significant issue relating to its AI based customer profiling system. The system designed to enhance consumer experience and target marketing efforts, was found to be misusing sensitive consumer data and making biased decisions. This resulted in several complaints, regulatory scrutiny and substantial loss for the company. For the company. What's been the impact? Financial costs, again, associated with notifying the consumers, legal fees, regulatory fines and compensation to those consumers. Reputational damage, again, loss of trust in the corporation. Reduce revenues, reduce sales and legal proceedings that happened. So during that claim, the Chief Technology Officer, responsible for overseeing the implementation of the system was found accountable for the incident. The claim for D&O coverage included, again, defense costs for the legal proceedings, settlement amounts for the lawsuits, costs relating to regulatory fines and penalties, expenses associated with the crisis management, management and reputational damages. Now this actually is an interesting one that I've heard recently. Before I made this presentation, I could have probably used it here. So for hiring employees, everybody now goes online and, you know, puts in the information, or they'll take your information off LinkedIn. They are using AI software to select candidates now that candidates sometimes that AI software, sorry, sometimes has biases because it was set up with biases. Or, you know, the AI just learns its own way, has a mind of its own, and it's sort of discriminating certain people or candidates from a job. So there's actually a couple of suits right now for that where the AI generated system has been selected, the has been discriminately selecting candidates. What's going to happen? Would that be interesting to see? But you can see how AI being integrated into our lives actually presents a lot of real life claims and exposures. All right, we'll continue on to corporate social responsibility. So lox Corporation proudly states that all their products are 100% Canadian. Recently, some information has leaked that indicates that certain components of lox products are imported from China and assembled in the US prior to being finalized in their Canadian facility. And you can kind of see a general trend going here, right? Financial costs. You're gonna have to pay legal fees. You have to pay the lawyers, you have to pay court fees, you have to pay things like that. Reputational damage, again, you can see it here and the legal proceedings that ensue. It's sort of very similar, because we're covering the same thing, but you can just see certain different exposures and where the D&O policy will come into effect, to help you with that. So again, the claim the COO responsible for overseeing the production was held accountable for the incident, the claim for DNR insurance covered. Again, the defense costs, settlement amounts for the lawsuits, costs related to regulatory fines and the expense. Is associated with that. So you kind of see a pattern developing of why you need the No, I'm hoping it's sort of opening your eyes to see this is why we need it, that this is what's happening in the market right now. So the last one, we'll talk about the environment, environmental, social governance, the loop, Inc, what's the name of a company launched the high profile marketing campaign promoting its new line of sustainable household products. The company claimed that these products were made 100% from 100% recycled materials and were fully biodegradable. Allegations have surfaced that only 30% of the materials are cycled. These allegations were later dismissed as false. Now there's a big point there that these allegations were dismissed as false. So even if an allegation is false or fruitless, they'll still be expenses that the company will have. You will still have litigation, and lawyers will take money if you're right or wrong. I think that's one thing that is definitely for sure, that the lawyers are going to get paid. So what I want to give that example is most of them are kind of similar. Even if the allegations are false, you can still have an impact. There'll still be a claim or an exposure there where you know you might have to pay $250,000 in lawyer fees and other fees to sort of say, well, no, this is not even correct. It's a baseless accusation. So even if your client tells you, Well, I'm doing everything right, nobody's gonna sue me. It's like, well, you don't have to be doing everything right. You can be, you can be doing everything right. And it could still be a baseless accusation, and that goes across the board like it could be an Employment Practices Liability allegation to say, well, you know what, you didn't give me proper notice before you fired? Well, you can prove that you did, but you're not going to show your employee that. You're going to show the employee that, but the employee say, I disagree. We'll see you in court, and that's still going to cost you 2030, $40,000 by the time it's all done. Do you have those funds set aside for baseless accusations? We don't know, and we are becoming a more litigious society, right? We always say the US is very litigious, but Canada is definitely becoming a lot and lot more litigious. So it's definitely something to consider. So for the claim, you see, the defense costs still covered by the D&O policy and the expenses associated with the reputational damage, you know, because obviously people heard it on the news. It's not recycled material. And then we will help with those expenses as well. Now I will like to say that for these claims, this is for a very good D&O policy that covers you for things like that, it is very important to check your D&O wordings and see what's covered and what's not covered. Certain things can be excluded. It's true for every insurance policy. So before you say, well, this will be covered double check, because there will be exclusions under D&O policy. For example, abuse related claims under a D&O policy are excluded usually. So things like that are things to keep in mind. So when you are talking to clients, you want to keep that in mind. So that's my big, big star there that to not take this as the actual policy that the client has at the moment,

 

Eduard Lecker  00:38:07

all right. And we'll finish with some risk mitigating strategies, what your clients can do, or what you can do as well in your organization, in your daily life, to help mitigate against these risks. Of course, we can't remove risk completely, but we can definitely mitigate against it. We can reduce the chance of something happening. Something happening. So you want oversight, board oversight every decision. You want to document it. You want to make sure that proper procedures were taking place. A lot of times, you have your sort of code of conduct, not code of conduct, but for the boards, a way you can reach a quorum, or how you make a decision you want to make sure you follow that. You want to make sure all your meetings are documented, because the hardest thing to do is prove something you did correctly if you don't have documentation, and not just good for any day life, just make sure you have it in writing kind of thing. Make sure to set up compliance programs, or have a compliance mindset. If you want to say it, like, even, I'm sure, a lot of us with our organizations, we have to do a yearly test or anything like that, to say, like, Okay, I understand the procedures. And it could be annoying. It's 30 or 40 questions we have to pass. But that's sort of the idea. You're showing that you have a compliance mindset, and you're teaching your employees what to do. You're you're showing that you are taking steps forward. Again, if you want to prove that you've done what you can, at least, you can show something for it. Same thing goes for ethics trainings. You want to do it for the directors, officers, employees, everybody related to your company, because again, a claim could come from an employee, not necessarily just the director officer, right? So you want to make sure that everybody's on the same board and sort of promote that mindset of we're going to do everything by the book. You want to have also internal controls. So for insurance companies, we have audits, right? I do my job. Somebody else takes a look at it. Because if you're going to ask. Me if I'm doing everything right, I'm going to say yes. So essentially, you want to make sure somebody checks other people's work. You want to make sure to separate the duties certain things not done by somebody else, right, like if I have to audit myself, if I have to manage myself again, whether the chance of something wrong happening because nobody's looking to what I'm doing right? And you want to make sure that those audits are regular. And we're talking about everything, even your compliance program. If you have a compliance program, you want to make sure somebody is auditing it, making sure it's a good program and not a poor one, and making sure people are following it. It's also a big thing. Whistleblower policies, again, you want to make sure that people could speak up and not fear retaliation. Retaliation is actually a covered loss under Employment Practices Liability where an employee said something say, Well, I don't think the company is doing something right, and then the company fires them because they put the company in negative light. So you want to make sure you have those whistle blower policies in place so employees feel comfortable going ahead to talk to somebody if there's something wrong, right, malicious or not malicious. Risk Assessment and Management very important to be proactive. Like I said, insurance, we usually tend to be very reactive. It is important to be proactive. So identify the risks if you've done your CRM courses, I think this is right, right up there. Identify the risk. What are the potential risks? Mean, the risks now are not the risks later. Like I said, AI may not be as much of an issue now, but five years from now, it will be right, like cyber security 10 years ago, was less thought out of risk evaluation. Evaluate the likelihood of something happening, like, Can this happen? What impact does it do for our company? Right? Can we handle that impact? How can we mitigate against that? Look at the costs. What can we do towards it? And make a plan risk mitigation plans. This is what we're going to do. We're going to address the issues, and we're going to go ahead and go with that. So those are very important things to look forward to. Like I said in the beginning, this does not guarantee that there nothing will happen, because, again, accusations could be baseless, and mistakes happen as well, right? And you can have the best compliance, or, you know, audit in place, or you think that it's the best in place, but then you find out there's some flaws in the actual audit where you're not checking certain things that you should be checking. So it's very important to have it as the sort of I call the live document, keeps evolving with the time, and always keep looking at it and always have it in the back of your mind. Again. It's not going to stop the claim, but it could reduce it potentially, right? So even if it's not going to stop you from that big claim. It could reduce the possibility of you getting one, or reduce the amount you're going to pay, right? So it's definitely a good strategy to have. So I'm going to conclude here with a slide. I'm going to say that D&O insurance is essential for private companies. Also we learn for non for profit. We all know it's good for publicly traded companies. It's important for any organization. You need to we understood the emerging threats and the risks and management strategies to do with them. I know that you are all going to take proactive measures to do whatever you can, to be, you know, compliance experts and making sure it's nothing happens to your company. But you know, make sure to explain to your clients that you know they need this coverage and continuous education. I cannot mention that because if you're here, you're already investing in your continuous education, and pretty much, we need to do everything we can to ensure the long term organizational stability. So I can pass it back to Paul now, who has been waiting anxiously there while I was speaking. Sorry, I can't give you a glowing introduction as well, but I'm not as good as you in that regard. So

 

Paul Lucas  00:43:52

well, you've definitely carried this without a doubt Eduard huge thanks. A fantastic discussion. We now have just enough time, of course, to take some questions. So asmentioned, please enter them into the Q and A box at the bottom of your zoom screen. If you haven't already, we'll try to fit in as many as we can. Eduard, I'll start with one that I picked up earlier. So this one is, what impact would the increased tariffs have on D&O coverage? I think you touched on that a little bit, but maybe you can elaborate a bit more. Elaborate a bit more.

 

Eduard Lecker  00:44:24

Yeah, for sure. So what impacts is, it's a good question. I can't say, of course, with 100% certainty, but increased tariffs are increased costs, right? So right away, you're looking at increased costs for businesses. So that's going to impact their bottom line, and what's going to happen, right? Are they going to increase their own costs? Are they going to have to change their suppliers? Again, that supply chain management is also impacting it, how it's going to impact it directly? We never know. But again, rising costs, of course, influences us, same as is, if the cost for the client goes up, they may not look. D&O insurance, because, well, that's an extra two, $3,000 that I don't have right now because of these increased tariffs, as a basic example. Or I have to change my supply management, or I can't even stay in in business, right? I can go bankrupt because I can't afford it. And if there's a bankruptcy DNR claim right there, that could happen if a company goes insolvent. So definitely, there's going to be an impact. What it is, it's hard to know at the moment, but again, we have to keep our eyes peeled, and you know, we might have new tariffs Tomorrow's the way this last few months have been going.

 

Paul Lucas  00:45:35

Definitely a rapidly evolving landscape. Got one that's come in from don don Maxwell, a little bit of a lengthy one, so bear with me while I read it. But it says we see on the P and C side, liability claims submitted and litigated, sometimes at great cost, to ultimately find out insured is not deemed liable, similar to those claims that are the result of those false and dismissed claims or allegations in D&O. Despite the fact that premiums are needed to pay these claims, it can be challenging to get the premium to account for these situations. So is there a good appreciation of this in the D&O space with brokers and insureds, or does a D&O underwriter face the same challenges in pricing?

 

Eduard Lecker  00:46:14

So yes, definitely. Uh, we face the exactly the same challenges, right? Because we do have to protect. We have a duty to defend the insured. And really, that's, that's the big challenge, right? That's the That's why they, they pay us. Actually pay us. The Big Bucks is, how do you juggle it? Right? Because, again, the client doesn't want to pay that much, but we have to cover a claim if it comes in, even if it's baseless and a soft market is reducing the prices, but we still need that premium to go. So it's sort of a juggling job to make sure that all of those aspects are hit, and we still want to give coverage to the client. We don't want to just deny claims as Contrary to popular belief. We don't just deny claims because we want to. We are in the business of providing peace of mind and that coverage. So it is definitely the challenge, and I say that all liability coverages face it, errors and emissions would face it as well, just as CGL, just as D&O does. Yeah, I would say for sure, that was my long winded answer to a long winded question.

 

Paul Lucas  00:47:19

Well, a much shorter one now. So the next question on the list is, what are some of the leading indicators to gage D&O volume and pricing?

 

Eduard Lecker  00:47:29

Well, what we look at to price D&O policy, essentially, we're looking at the the company's financials is the big one, right? So I know we look at application as well, but you know, the financials are the big things, essentially, how can a company stay afloat? That's for the D&O side. Because the biggest exposure for D&O is insolvency, bankruptcy. That's probably the big one, because when a company goes bust, a lot of lawsuits come there. So we want to look at things like the revenues, their expenses. I mean, they could have high revenues, but high expenses. So they're not profitable. Can they sustain being not profitable for the foreseeable future a company? There's obviously good and bad reasons for it. It's good, obviously when they're profitable, but when they're starting, it's hard to be profitable. Of course, you're just dumping money in. Going to look at how much assets they have, so essentially, your cash, equipment, all that stuff and their liability, how much money they owe. So that's what we look at, the financial statements, in a nutshell, that's what we're looking at. We're also going to look at for the other coverages, let's say, employment practices, liability. We're going to look at what procedures they have in place. Most applications will have some questions about, well, do you have an HR department? Do you have a policy for, you know, letting somebody go, terminating somebody. Do you have a policy for this? Do you have a policy for that? We're going to look at that. We're going to look at how many employees you have right, more employees, more chance of something happening, and the claim being paid out. And for fiduciary which usually gets overshadowed, we definitely look at what type of plan they have, and is it well managed? Do they have enough funds in that plan, so assets in the actual benefits and pension plan to sustain all their employees coming in? So that's an high level. That's the things we look at for the pricing of a D&O policy. But of course, like with everything, which is why we're not raters, we're underwriters, I think somebody told me that, and that's, I feel that's a good expression. On paper, things can look fine, but there's other things you can find that might not be great, not just claim past claims or things like that. You can see I mentioned earlier that the ownership is all owned by family. That brings another dynamic into it that could be an issue, whereas on paper, it could look everything nice, but it's all family owned, so they could be in family disputes. Doesn't mean we're not going to write it, but there's other things that you kind of that just not numbers are going to tell you. So there's a lot of indicators which could be its own presentation of how we're going to underwrite a D&O policy.

 

Paul Lucas  00:49:58

Yeah. Of course, we've still got around 10 minutes of this webinar remaining. So anybody who just wants to throw in a question in the Q and A box, please do so we still have a few to work through already. I'll attempt to summarize this one. Basically, it's talking about D&O and cyber and a little bit of a sort of a gray interplay between the two. It says, can there be overlaps in cover?

 

Eduard Lecker  00:50:21

I mean, yeah, for sure. I mean, like a lot of things, you will see that there's overlap in certain coverages, like liability coverages, sometimes D&O and Eno overlap on certain things. That's why you don't usually say you want to keep stuff with the same company. So even if there is overlap, there's not going to be fighting over it. You know, the company is going to pay it, but then they're going to deal with it on the back end under, excuse me, which policy? But I mean, there is, there is overlap, but it's not as big as you think. Like, if we're gonna do a Venn diagram, it's gonna be very clear, I keep looking at over there, but yeah, it's small like this, since cyber covers different things than a D&O policy, right? D&O policy covers the directors and officers response, or maybe lack of response or lack of action into those things. Whereas cyber policies, and I'm by no means a cyber expert, usually covers the actual like, funds, laws, getting the systems back in place, a D&O policy will not cover that. So you can say I'm safe. I have a cyber extension on my D&O policy, because there's things like ransomware, where, you know, they hold the company's information for the money. So things like that are covered a cyber policy. So I hear if your policy covers it, but the D&O policy generally doesn't cover it. So there is overlap, but there isn't a lot of overlaps, right? So it's important to have both this, which is really what it is, right? I mean, my question in the beginning was, who needs insurance? And the answer is, everybody. I think it's always a good say all insurance is necessary. Insurance needed by anyone. It's an easy thing to say, but it's a hard thing to give a real life example and explain why you need it, which is, I kind of try to do that with a D&O today. Why you need it. If you're interested about cyber I'm pretty sure there's another cyber thing happening where they can explain detail why you need cyber coverage, right?

 

Paul Lucas  00:52:10

Well, here's a quick fire one for you. Edward, how long do you think the market will stay soft for long time?

 

Eduard Lecker  00:52:18

I mean, I think when they say hard markets. So this is my first and only hard market. And the one before that, I believe people say, was after September 11. So 2001 to 2020, you look that was the 19 of kind of a soft to soft ish market, where only got hired for a couple of years, which is the general cycle. So I think it'll remain soft again, probably for a while. Now, how soft is a different question, right? Like, we can't just be lowering prices indefinitely, because then claims will come in, and then that will increase the price again, and anything could happen to make the market hard again, right? We don't know the future. I foresee it being soft for a little while, until everybody relaxes at this little, uh, race to the bottom and premium that we have right now in the D&O market, and at some points we're going to have to increase in a bit. But it still won't be the same as it was during the hard market. It'll still be, I would consider it a soft or a medium this. There's not really a term for something in between, but closer to the soft market is going to be there for a while, so strap yourself in.

 

Paul Lucas  00:53:27

All right. Next question for you, just throwing them at you at the moment to keep being filed in course in the Q A box at the bottom of your zoom screen. So what are the key reasons for some markets position to avoid D&O for public companies/

 

Eduard Lecker  00:53:42

Why they avoid the no for public companies, that's a very good question that I'm personally involved in where I'm working. I mean, the litigations, of course, when it's a public company, pretty much it's available. The information is available to everybody and anybody can be an investor, right? Whereas, like, if I open my own construction business I incorporate. It's me and three of my business partners. We're the shareholders. We might have infighting. Anybody here that's above 18 can log on to quest trade or Wealthsimple or whatever, and you become a part owner of whichever company, CIBC, BMO or something like that, right? Technically, you are a part owner, not fractional, a very small part of it, but you are an owner, right? And you can vote, you can attend other general meetings and things like that. So you're essentially opening it from, let's say, 10 shareholders to a million shareholders, potentially, right? And you know, if the stock loses money, and you need that money, you're going to be more likely to be upset, as we've seen, like a lot of litigations, let's say 2008 in the States and in Canada, we saw quite a bit because of, you know, the economic downturn. So that's why I think a lot of companies are scared of it. Should you not write it? That's. Different discussion. I think you should, but I can see why people will shy away from it. But then again, I would say you can shy away from any insurance. You know, like I said, there's always an exposure, so you can always say, well, there's going to be a claim happening. That's why we're in insurance, right? So you can shy away from any any risk.

 

Paul Lucas  00:55:21

I'm just going to throw three more at you, Eduard, because I think you deserve. You deserve a little bit more water and a bit of a break, I think. But so the next question is to share some thoughts or experiences with non profits.

 

Eduard Lecker  00:55:36

As far as D&O so very open ended questions. Yeah. I mean, it's people think nonprofits are also not, how you say it not open to claims or exposure. There's no exposure for D&O, which is this not necessarily true. Again, you are dealing with usually if you're a nonprofit. Again, there's a charity and there's a nonprofit. There's a little bit of a distinction, because a condo board is non profit, but it's not a charity. Just to give you an idea, right? So something like a condo board that's a non profit, I think most people will see the issues, because, you know, we all live somewhere we didn't like what management was doing. Again, that's going to cause potential issues for lawsuits. But for a charity, on the other hand, you are dealing usually with vulnerable groups of people that you know could have more to lose than you just you know, money, right? And those things obviously are harder to prove and harder to quantify financially, like you know, how well would you what's the price for your mental health kind of thing, right? How much would you price that, you know, for me, maybe $50 for somebody else, 10 million. It depends on the person, right? So a lot of people think they don't need it because, well, it's a non for profit. You know, it doesn't matter. They're not going to go bankrupt. Blah, blah, blah, blah, blah. But there's other issues. You also have nonprofits with employees. You have volunteers and things like that, which are technically kind of like your employees, not exactly the same, but you know, if you kick off a volunteer, they'll be upset. There is litigation. There a lot of non for profit warnings do include volunteers as employees, essentially. So my experience is they probably it's not on their forefront of their mind, but it is definitely something that is necessary. Like I said, you need it, and this is why you need it. I'm not just saying you just need it, because, you know, somebody tells you you need these are the reasons. These are the exposures that you're trying to cover for yourself. Because the other day, you want your organization to succeed and continue. If you didn't care, then why? Why even start the organization, right?

 

Paul Lucas  00:57:41

Well, that was quite a wide question. This one is a little bit more narrow for you. It's thoughts on D&O coverage provided by an association, particularly if the head office is not in Canada.

 

Eduard Lecker  00:57:53

Okay. I mean, that's that's probably a wider question than the other one. It really depends. It depends on what they have on their wordings. And without seeing the actual policy, it's hard for me to say if it's good or bad, right? I mean, again, different jurisdictions, different requirements. I've only worked with Canada, so I know Canadian wordings, again, in general, and the companies I worked for, and if they change them, of course, it'll be something different. I've seen a few us wordings. Again, it's fairly similar to Canada. But what if the company is in France? What if the company is Sudan, right? Various regional, various differences? It's hard to say exactly. If it's a good or bad thing. Read the policy. It's, you know, they want to read the conditions. You want to take a look at it. There will be ones that are stronger than what you can get in Canada. I would not put it past certain insurers, right, but there will be ones there don't offer any coverage, right? So whether it's good or bad will depend on the individual policies. And like I always say, read the wordings and take a look. Nobody wants to do it since it's I know it's tedious, it's repetitive. It's not written like a Stephen King novel, but you know it's important for your clients and for you to know what they're covered for.

 

Paul Lucas  00:59:08

Well, you can decipher exactly what this one means, but quite simple. It says, are D&O policies mainly claims made?

 

Eduard Lecker  00:59:17

Yes, they're mainly claims made. Yes, that's that was a simple one. All right.

 

Paul Lucas  00:59:24

Well, we don't want to finish with anything too easy, so I'll just bring up one that we had earlier as well, which is, how can brokers use the soft market to better sell D&O coverage?

 

Eduard Lecker  00:59:35

To better sell D&O coverage? I mean, use the soft markets. That's actually a very good question. You chose the hardest one for the end. That's something I'm struggling with personally as well. I use the soft market to the better. I mean, it's good time to educate the clients. Pricing is definitely low. That's, I think that'll probably be the best one to say that. Like, if you want to get in now, this is one. The price is low. I know, two years ago it might have been like unaffordable, but now pricing is definitely very low. So you can use that, and I don't like to sell based on price, but you have to be realistic that people do look at price. It's important. Yeah, I think the price is probably the easiest during a soft market. But also think about this way you are providing value as a broker to your client, and what is your value, right? Not not saying it in a bad way, like, what is your value? Like, what is your value? You gotta ask that you everybody has their own value to the client, right? Every broker is different. So if you don't use this time when they can shop around and get a better price and go somewhere else, why should they stay with you? Like they can you? You're a broker, you're dealing with 10 companies. You might not deal with five others. They can give a cheaper price. Why is the client staying with you? Right? So you gotta think about that. So during the soft market, yeah, you can get a cheaper price, but then it's going to go up higher, and he's going to cancel the policy, or he's going to go somewhere else to get a cheaper price. So think about what value you bring to keep him here. And it's important, of course, during the hard and soft market, but during a soft market is more important because price is going down. People are very price conscious. Why would they stay with you? Like and I've seen policies, and it's not the fairy tales that were more expensive. Even when I worked the brokerage and they stayed with us, they stay with the brokerage just because of the relationship with the broker. So it's not the fiction. I won't say it happens all the time, but it does happen. What's the value that you're bringing to them? Why do they want to stay with you? So I kind of answered that question with the question is, what I did.

 

Paul Lucas  01:01:44

That's a good way to wrap up, nonetheless. Eduard, fantastic throughout this, and I'm sure everybody's really appreciated it. But that is, of course, all we have time for today. Huge thanks to everybody who's participated in our polls and indeed, with the questions as well. Remember, if you missed any of today's recording, it will be available on the insurance business Canada website in the coming days, so watch out for that in the meantime, thanks again to Eduard and, of course, to sovereign insurance. And on behalf of Insurance Business, take care, stay safe. We hope to see you all again soon.

 

Eduard Lecker  01:02:15

Thank you, everyone.