Natasha Romagnoli and Hannah K. Ahn
With the recent rise in novel diversity lawsuits, which have targeted some of the leading companies across the country, and are sure to be a hot topic of litigation this year and beyond, policyholders are highly encouraged to review their existing directors and officers (“D&O”) insurance policies to ensure that they have adequate protection in place to cover diversity claims.
If you are one of the more than 100 million people who watched the Super Bowl, you noticed that companies are starting to be more vocal about the importance of diversity. With ads featuring all Black actors and more modern families, companies are celebrating inclusion and promising to join the fight to end systemic racism. The NFL itself is a prime example of this change in messaging. Years after Colin Kaepernick faced backlash for kneeling to protest inequality, the NFL ran its own ad this year that highlighted its pledge to spend $250 million to end racism.
Talk of diversity and inclusion has been growing—and growing more insistent—starting with the first Black Lives Matter protests in 2013 and building to last year’s protests following the murder of George Floyd, who died while being forcibly detained by Minneapolis police. Despite their messages of support for diversity and inclusion, however, many companies have struggled to promote diversity in their own ranks, especially with respect to their boards of directors and C-suite executives. But consumers and investors alike are now pressuring companies to meaningfully respond to their demands for internal change. Of late, this includes shareholder derivative lawsuits that use federal securities law not only to target the company’s lack of success in diversifying, but also to challenge the commitment of the company’s directors and officers to enact change. These novel “diversity lawsuits” open a new realm of potential liability, in addition to forcing companies to consider how to promote diversity in their ranks and respond to internal and customer demands for change.
While there have only been a handful of diversity lawsuits filed as of today’s date, the allegations against some of the best known names in business, like Facebook, Oracle, and Monster Beverages, could easily apply to other publicly-traded companies across the country. The individual details vary from case to case, but the common charge against the directors and officers of the sued companies is that they breached their fiduciary duties and violated Section 14(a) of the federal Securities Exchange Act by failing to include diverse directors on their boards and in their senior executive ranks, while at the same time touting their commitment to diversity, equality, and inclusion in the company’s proxy statements and other corporate publications. Corporate counsel can forget about their old playbook for dealing with employee discrimination complaints or outside groups threatening a boycott. This is new legal terrain being staked out by stakeholders in companies (in some cases, institutional investors) and the class action lawyers representing them.
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This client alert was reprinted in Wolters Kluwer Legal & Regulatory Solutions U.S. in April 2021.
1. Assess the policies you have and reassess the policies you should buy in the future.
Social engineering scams seeking to deceive companies into making wire transfers to fraudulent bank accounts continue to plague companies. According to the FBI, social engineering fraud costs businesses billions of dollars each year. On top of the lost funds, social engineering scams can lead to substantial investigation costs and even litigation.
Last week, the Seventh Circuit had occasion to consider the scope of a contractual liability exclusion in the context of professional liability coverage. In Crum & Forster Specialty Ins. Co. v. DVO, Inc., No. 18-2571, 2019 WL 4594229 (7th Cir. Sept. 23, 2019), an insurer insisted that its contractual liability exclusion did not render the professional liability coverage it sold illusory. The Court disagreed, however, holding that the exclusion was overbroad and would, if applied, defeat the fundamental purpose of the insurance. The Court further concluded that the policy must be reformed to meet the policyholder’s “reasonable expectations” of coverage.
The insurance market has proven to be a difficult environment for buyers in 2019. The long tenure of the soft insurance market cycle is changing, and is presenting challenges with pricing, capacity, and sustainability of favorable coverage terms. Coming out of difficult natural catastrophe years in 2017 and 2018, the property insurance market took a sharp turn to protect insurers’ bottom lines. While hardening of the property insurance market was expected, the broader casualty market has taken this opportunity to drive corrective action on their portfolios as well, leaving insurance buyers with little leverage.
Many corporate executives generously serve as directors and officers of nonprofit organizations. While they are undoubtedly inundated with meetings and workshops focusing on corporate risk management at their day job, they may not consider potential liability arising from their philanthropic work. Just as a corporate director may face lawsuits, even those lacking merit, for allegedly breaching fiduciary obligations to shareholders, so, too, a nonprofit director may face similar allegations of wrongdoing for a broad range of activities including, for example, allegedly permitting the mismanagement of funds or approving an employee’s termination. Even if the director ultimately prevails after a trial on the merits, the nonprofit may not possess the financial means to indemnify her or his legal fees. Before any such issue threatens financial well-being, it is prudent for any individual joining a nonprofit organization to take the time to make sure the nonprofit has appropriate insurance coverage. So what is appropriate coverage?
On Tuesday, in deciding 
nt order will not determine a policyholder’s rights under an insurance policy. Using the court’s analysis, the insurer must examine the nature of the disgorgement payment to determine whether it represents revenue that the policyholder pocketed or improper profits acquired by third parties. If the disgorged monies are not the policyholder’s own revenue, then the company will not be unjustly enriched by recouping insurance proceeds and may obtain coverage for its loss. This is particularly good news for financial companies with potential liability to the SEC for allegedly ill-gotten profits that ultimately end up in third parties’ pockets, such as hedge fund customers.