By Heiko Würtz, Managing Director, Head of Financial Lines HDI Global Specialty SE

Passing the Buck: The term comes from poker played on the American frontier. A buck, or knife marked whose turn it was to deal. If you didn’t want to deal you could opt to pass the buck.

It was president Harry S. Truman who famously said: “the buck stops here.” He even had a special sign made up and placed on his desk in the Oval office. It was a reminder to him and others that he made the decisions and accepted ultimate responsibility for what happened as a result.

It’s also a reminder to directors and officers today that accountability sits with them for what they do, or don’t do.

When considering D&O cover, there is often analysis of the wording, the Side B cover for the company and the Side A for the individual director. Then, the price is assessed and often this becomes the real driver. But the thing is, D&O is a very different and a very personal cover to other insurances in the commercial sphere. It is much more than paying the costs, this is about how to handle a crisis. Let me explain why with the following scenario.

When the buck stops at your front door

It’s Saturday morning, an executive is settling down for breakfast. It should be a moment for some much-needed relaxation, an opportunity to recharge the batteries and spend quality time with their family. A police car pulls up outside, lights flashing causing neighbours’ curtains to twitch. A D&O claim is about to unfold, and in that moment, the premium and wording are far from the mind of this executive.  They are feeling alone, worried, and anxious. Their world is caving in around them and their personal reputation is on the line.

As this situation starts to play out, they of course need to know they are covered. But more than this, they need advice, comfort, and reassurance. But who do they turn to? An instant reaction might be to talk to a family friend, a lawyer they know. This is understandable but what this person really needs is specialist, a calm head in a crisis and a team of people who have been through this scenario many times before.

What’s the worst that could happen?

Typically, a modern business should be set up to manage risk efficiently and effectively. Sound risk management plans, scenario planning, contingency planning, and risk registers are key parts of the framework. The difference with D&O is that it can be an individual rather than the entity that is primarily at risk. So, when the worst does happen, it is a crisis management and recovery situation. Also, this may not have been as easy to map and mitigate as say the number of slips and trips.

The emerging risks

The D&O risk landscape is shifting rapidly. While the underlying risks are still based on the actions or inactions taken by directors, the scope has changed dramatically. There are also a range of stakeholders including shareholders, employees, customers, suppliers, regulators, and authorities. Increasingly, their claims relate to systemic and business-wide risks. But the buck has to stop somewhere, and it could well be stopping at a director’s door – maybe, as we have seen, on a Saturday morning.

Crisis, what crisis?

The underlying culture of a firm can be the trigger for a variety of claims which could find their way to the boardroom. For example, if a firm was held to have a toxic culture where either sexual harassment or racism were endemic then it is understandable that a spotlight will fall on the senior management. There are other pitfalls too, here are a few:

Cyber – a major breach can be a very high-profile event. It could attract the interest of regulators, shareholders, and even a class action by customers.

Brand and reputation – that cyber incident or evidence of a culture where sexual harassment runs deep could also generate claims which could draw in the directors. So too could climate change, or even loose talk on social media.

Class actions - a hit to the share price could lead to fingers being pointed and in short order litigation by disgruntled shareholders. The share price drop itself could be the result of any of the examples above. Whatever the cause, reports show that class actions doubled between 2017 and 2019 in the US and are at their highest level ever.

International programmes – for global businesses, a fit-for-purpose Directors’ and Officers’ policy should be a must-have. The complexity of legislation means that it is essential that risks are understood, and a robust policy is in place that satisfies local regulations, which could mean the need for numerous local policies worldwide.

In the modern business world when the buck does stop with a director, they need to be prepared and, more importantly, know that there is a specialist team ready to step in and guide them through to the other side. The path can be tricky, but with the right support it need not be treacherous.

If you would like to know more about how HDI Specialty can help you with D&O insurance, please contact the team

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