In today’s global economy, the rise of protectionist policies, particularly those involving tariffs, is necessarily becoming an area of focus for directors and officers. With the threat of tariffs in the headlines before and after the new US president took office in January, corporate leaders have had to address the foreseeable impact of tariffs on their organizations. With tariffs now in place, at least to some degree depending on country, directors and officers are challenged to anticipate the longer-term consequences.
In a political climate where trade policy changes quickly, and which may or may not be short-lived, for directors, officers, risk managers, and their advisors, understanding the interplay of tariffs and D&O risk is crucial.
Tariffs can impact company performance in many ways. Foreseeable effects include, but are by no means limited to, the following:
In addition to impacts on performance, corporate decisions made in response to tariff policies can also give rise to D&O claim exposures, including:
D&O policies are, by design, written expansively to cover “Loss” arising from “Claims” against “Insureds,” including directors and officers. Such Claims must allege “Wrongful Acts,” which are customarily defined to include acts, errors, statements and other forms of conduct in the director’s or officer’s official capacity. As to alleged conduct in their official roles, therefore, individuals are broadly covered — subject, as always, to policy limitations and exclusions, including the exclusion for finally adjudicated deliberate misconduct.
For public companies, coverage for the organization itself is limited to “Securities Claims,” such as shareholder class actions and derivative lawsuits. Under typically worded D&O policies, these claims are generally covered. Consumer actions, however, presumably without securities-related allegations, would not be considered Securities Claims. Many D&O policies provide response costs coverage for pre-suit derivative demands and related books and records demands, subject to sublimits of liability.
Private companies have broader entity coverage that protects against, at least to some degree, non-securities related exposures. Exclusions that may apply in the context of tariff-focused claims could include those for antitrust and false advertising, such as price fixing, restraint of trade, and unfair or deceptive trade practices. Private company policies also generally have some form of contractual liability exclusion.
While both public and private company policies often include coverage for individual insureds who are targeted in government investigations, it is not customary for policies to cover investigations into the entity itself. For public companies, conditional coverage for this exposure may be available on a case-by-case basis, often for additional premium. If coverage for the exposure is afforded to private companies, it is most commonly subject to smaller sublimits of liability.
Policies vary on the scope of coverage for enforcement actions brought against entities. Public companies will most often have coverage for this risk if the proceeding is a “Securities Claim” and if it is concurrently maintained against one or more individual insureds. Thus, proceedings brought by the SEC alleging violations of securities laws may have limited coverage, while proceedings brought by the Federal Trade Commission (FTC) or other non-securities regulatory authorities might not be covered. Private company policies do not typically restrict this coverage, considering regulatory proceedings to be “Claims.”
D&O policies are also designed to be responsive to most claims involving distressed risk, including claims brought by creditors, trustees and shareholders. Bankruptcy-focused D&O coverage specialization is essential in times of uncertainty. Companies with any inkling of upcoming issues should contact specialized D&O brokerage distressed risk teams sooner than later (but it’s never too late).
Companies with more direct exposure to tariff-related risks may begin to experience D&O underwriting protocols that include questions focused on trade risk and practices, such as supply chain dependencies. Currently, however, the scope of underwriting scrutiny is not widespread, but questions can, do and will continue to arise relative to a business’s operations and customer bases outside the United States. Whether more scrutinizing underwriting practices arise may depend on whether the administration’s protectionist policies are short-lived or become protracted.
The key to mitigating tariff-related D&O risks lies in proactive and informed governance. An understanding of the evolving political landscape, combined with risk management strategies, is important. Boards, executives, risk managers and their advisors should consider several actions, including:
WTW hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
