Social Inflation Risk To Directors And Officers

By 27 May 2020Blog

The spread of social inflation

The speed at which the coronavirus has spread around the world illustrates the effectiveness of globalisation. In just a few months, one virus in China has infected 2.2 million people and reached over 180 countries. It isn’t just viruses that travel at this speed. Globalisation and greater global connectivity have allowed social trends to travel from backwater to high-rise within hours, and therein lies one of the major risks facing today’s Directors and Officers.

Trust in corporates and politicians has been undermined by the perfect storm of financial crisis, political scandal and poor corporate practice, among other themes. This social trend may have started small, but globalisation has allowed it to reach every corner of the globe. We’re now seeing an exponential rise in litigation action against corporates and their Directors and Officers, supported by the tailwind of increased third-party litigation funding. The trend is known as social inflation: an increased rise in claims as the same social trends are repeated throughout the world, and it’s something a Director or Officer can insure against.

Repeated failure

The economic instability and anti-corporate sentiment that followed the 2008 global financial crisis gave rise to societal unrest. Those that lost their livelihoods and homes wanted answers and they didn’t trust the mainstream politicians to provide them. Society began to look to the politicians who broke the mould and suddenly support had risen for populist parties across the globe. As society looked for answers in a new political landscape, they also became less enamoured by the corporate machine that powered the wheels that drove the financial crisis in the first place.

This dissatisfaction with corporate culture and the political mainstream has coincided with a rise in social empowerment and third-party litigation funding, giving this anti-corporate sentiment serious financial and crowd backing. Third-party litigation funding is now a significant industry in itself and one which is reshaping litigation around the world.  In 2019, the management of Burford Capital (one of the leading litigation funders) felt the might of the crowd as it was targeted by Muddy Waters, the infamous short seller, resulting in a 50% drop in their share price. There is serious weight to the threat of social inflation, no one is immune.

Implications and actions

This trend has now reached every corner of the corporate landscape and with it, a significant rise in the potential for litigation. In many jurisdictions around the world, if the decisions made by directors and officers of corporations lead to adverse outcomes for the company or its stakeholders, those individuals can now be held personally liable. The personal consequences are more acute if Directors and/or Officers can be shown to have acted in an imprudent or unprofessional manner. As such, Directors and Officers must be more vigilant than ever to follow best practice and ensure good corporate governance is at the heart of their business.  This is a challenge at the best of times, but under remote working and times of crisis this will be even more difficult, with lines of communication and protocol inevitably overlooked or side-stepped in the need to respond. This causes immediate risk.

Directors and Officers that are doing all they can to promote best practice, act with necessary and appropriate due diligence, and operate with corporate social responsibility at the core of their organisations culture will be less likely to fall foul to such forces. Boards can go further to protect Directors and Officers by taking out Directors and Officers insurance to offer indemnity against many of the issues they face.

In light of this rising trend, buyers of Directors and Officers insurance should seriously consider the adequacy of their limits of indemnity and review their wider insurance position.

About Elmore Insurance Brokers

Elmore Insurance Brokers Limited advises its clients to actively manage risk to manage down premiums.  Insurance is a partnership between businesses and insurers. This partnership can be significantly enhanced by focused engagement to understand and implement information security risk management best practice, which includes cyber insurance.

Written by Simon Gilbert, Founder & Managing Director, Elmore Insurance Brokers Limited.