The Rising Edge 2024 Review
The Rising Edge 2024 Review was compiled and written by Hamza King.
In January 2024, Rising Edge published it’s predicted trends for 2024.
With the end of the year on the horizon, we look back on what happened in 2024, how our predictions measured up to reality, and review other trends we observed across the world of management liability.
Directors & Officers (D&O) Liability
Use of AI, AI Washing and Increased Cyber Exposures
In January 2024, we predicted that, “Increased Use of AI and Emerging Technologies in the Boardroom, Coupled with Increased Cyber Exposure, will Drive D&O Claims.”
Well, as a starter, there were 13 artificial intelligence-related US securities class actions filed in 2024. That’s a significant amount of D&O litigation loss when you consider the costs of defending these suits, let alone the losses which may be incurred in respect of settlements for those claims which survive a motion to dismiss. Alongside this litigation, we witnessed regulators in the US taking a tough stance on AI Washing.
AI Washing occurs when a company overstates the AI capabilities of its products and services, or the company’s use of AI, leading to allegations of misleading the public.
In March 2024, the soon to be former SEC Chairperson, Gary Gensler, released a statement stating that, “Public companies should make sure they have a reasonable basis for the claims they make and yes, the particular risks they face about their AI use, and investors should be told that basis.”
In the same month, US companies, Delphia (USA) Inc. and Global Predictions Inc. agreed to pay a combined $400,000 to settle SEC claims that they made “false and misleading statements” about their purported use of artificial intelligence.
Later, in June 2024, the SEC expanded its “war” on AI fraud to include private market participants, filing securities fraud charges against Ilit Raz, founder and former CEO of defunct AI recruitment startup Joonko. The SEC’s Complaint alleges that, to raise money for this purported AI venture, Raz made material misrepresentations about Joonko’s business, including its customer and user base, its technology, and its revenues. Before these charges against Raz, the SEC’s actions and rhetoric to fight AI washing had been limited to investment advisers, broker dealers, or companies raising money from the public. The charges against Raz show that the SEC is reviewing any representations concerning AI technology that do not fairly or accurately describe its design or use, regardless of the identity or size of the market participant.
Use of AI brings opportunities but also litigation and regulatory risks for directors and officers and corporations, which we see manifesting in the examples identified above. And, whilst Gary Gensler is due to step down from his role as Chairman of the SEC in January 2025, we expect use of AI and public statements on AI to continue to be a key area of focus for the agency, and other regulatory bodies, over the next 12 months.
Moving to cyber exposures, professionals within the cyber insurance market often remark on the level of underinsurance that exists with respect cyber exposures, and the fact that the entirety of the global insurance market itself doesn’t even have the aggregate capital to deal with the financial losses which could be incurred following a ‘black swan’ cyber event.
On the 19th of July 2024, the American cybersecurity company, CrowdStrike, issued a faulty software update which resulted in over eight million computers crashing and being unable to restart. The outage caused massive disruption to businesses and governments around the world. Nit Perry, CEO of cyber insurance risk platform Cyberwrite, estimated that ‘economic damages could reach tens of billions of dollars’.
In an example of classic ‘event driven’ litigation, and cyber events ‘leaking’ into D&O losses, within 2 weeks of the event, a securities class action lawsuit was filed against the Company, its CEO and its CFO, in the Western District of Texas. This lawsuit is ongoing, and we would expect to see more developments on this case during 2025.
Whilst the CrowdStrike incident caused widespread disruptions and economic loss, the impacts were eventually contained and recoverable. Will 2025 see a “black swan” cyber event?
We certainly hope not, but the CrowdStrike case provides another shot across the bow of corporations and directors navigating a world where cyber exposures are ever increasing.
Directors & Officers (D&O) Liability
Climate Litigation and Greenwashing
In January 2024, we predicted “Record Litigation Related to Corporates’ Responsibilities Regarding the Climate Crisis”.
Whilst the jury is still out on 2024 (watch this space!) the Grantham Research Institute on Climate Change and the Environment published a report in June 2024 which found that climate-related lawsuits are rising swiftly, with “climate-washing” or greenwashing being one of the most rapidly growing forms of litigation, with positive outcomes often coming for those who bring the cases forward. Of the 140 greenwashing cases reviewed between 2016 – 2023, 77 have officially concluded, 54 of which ended with a ruling in favour of the claimant. The United States accounted for the vast majority of litigation, with 129 greenwashing cases in 2023; the United Kingdom was second with 24 cases.
These court trends mirror public sentiment and rising governmental regulation on climate-related issues. One example of this is the Australian Government which sought to crack down on greenwashing by introducing new ESG labelling requirements aimed at steering more capital into credible sustainable activities. This new requirement calls on large businesses and financial firms to incorporate climate disclosures based on the Australian Accounting Standards Board’s guidelines.
The one country which appears to be bucking the trend is the United States. In addition to a number of ESG ‘backlash’ lawsuits, the SEC’s mandatory climate-related financial risk disclosure rules for public companies and in public offerings, enacted earlier this year, has faced multiple legal challenges, and commentators expect that the rules are unlikely to survive the incoming Trump administration.
Finally, other than perhaps in the US securities litigation space (where everything is securities fraud!), we have yet to see climate-related litigation translate into significant D&O loss. We still consider this to be on the horizon though as funders and plaintiffs learn lessons from the past and develop new legal theories.
Directors & Officers (D&O) and Pension Trustees Liability (PTL)
In 2024, we saw the conclusion of litigation brought by the liquidators of British Homes Stores (BHS) against its former directors.
Ex-BHS directors Dominic Chappell and Lennart Henningson were ordered to pay at least £18m to creditors for their role in the collapse, and this development brought much renewed media attention to the case.
Whilst the court’s decision in the liquidator’s case against the ex-directors is a fascinating development from a directors’ and officers’ liability standpoint, it should not be forgotten that one of the most damning indictments of the whole scandal was the management of BHS’s defined benefits pension fund, which declined from a surplus position of £43 million in 2000 to a deficit of £345 million in 2015, and eventually a deficit of £571m at the time of the administration.
This left 20,000 current and former employees facing reductions to their pensions of up to 77%, and the scheme being handled under the Pension Protection Fund. Following an investigation by The Pensions Regulator, Green reached a £363m settlement with them, plugging a significant hole in the fund. Chappell was also ordered to pay £9.5m into the scheme following contribution notices issued by the regulator.
Rising Edge’s analysis of the BHS pension scandal along with the “Lessons for Pension Trustees” can be found here.
Another important development in the pension trustee liability arena in the UK was the issuance by The Pensions Regulator of its new General Code of Practice, which came into force in March 2024. This code included increased emphasis on governance and compliance, and ESG concerns including climate change and stewardship considerations.
Employment Practices Liability Insurance (EPLI)
In January 2024, we predicted that, “Geopolitical Tension and an Uncertain Macroeconomic Environment will Further Complicate Directors’ Roles”.
In the UK, the dire economic environment was a pivotal factor in the loss of confidence in the incumbent Conservative government. In July 2024, a new Labour Government came into power, and with it came bold proposals to reform UK employment law.
In their plan to ‘Make Work Pay’, Labour promised before the election to work on ‘delivering a genuine living wage, banning exploitative zero-hour contracts, and ending fire and rehire’. Since coming into Government, Labour have been under heavy scrutiny with many wondering whether, and to what extent, they will follow through on these proposals.
On the 10th of October, the Labour Government published their ‘Next Steps to Make Work Pay’ a document which sets out the implementation process for their plan to ‘Make Work Pay. The Government states that it will approach their plan in phases. The first phase of the Government’s plan to ‘Make Work Pay’ is implementing the Employment Rights Bill (‘The Bill’).
The Bill will bring forward a range of policy measures designed to support employees, workers, and unions. First, it will provide all employees “day one rights” to paternity leave, unpaid parental leave, bereavement leave, as well as protection from unfair dismissal. Second, it will tackle one-sided flexibility by banning exploitative zero-hours contracts and abolishing the practice of fire and rehire in order to protect vulnerable workers. Third, it will bring forward measures to modernise trade union laws by simplifying the union recognition process and bringing a new right of access for union officials to meet, represent, recruit and organise members.
On the 26th of October, the Government introduced The Worker Protection Act 2023 as an Amendment to the Equality Act 2010. This Amendment will impose a new duty on all employers to take reasonable steps to proactively prevent sexual harassment in the workplace.
Harassment by 3rd parties is not currently covered by the law. The Worker Protection Act 2023 will also amend this to include 3rd party harassment in the provisions of the Equality Act 2010.
The Rising Edge team, in collaboration with law firm Browne Jacobson, analysed this new risk landscape for employers and directors in light of The Employment Rights Bill, and what it means for EPLI policies. You can read the full article here.
Further, there is no doubt that we saw continued geopolitical tensions across the globe in 2024, and the case study of Super Micro Computer Inc, highlights how geopolitical tensions can complicate directors’ roles by increasing scrutiny over export controls and related party transactions. In this case, allegations of violations of US sanctions, amid heightened trade restrictions with Russia, couple with alleged accounting irregularities, triggered a shareholder class action lawsuit
Commercial Crime Insurance
A prevailing trend within commercial crime continues to be employee fraud (i.e. theft from the company), which tends to increase during periods of economic instability. Having said that, third-party fraud continues to evolve and provide some of the most intriguing case studies.
In February 2024, news of a finance worker paying out $25m after a video call with a deepfake ‘chief financial officer’ hit the news. This case exemplifies the evolving nature of crime risks in the digital age and the importance of enhancing traditional fraud prevention measures, which may not take into account the risk of deepfakes. We expect AI deepfakes to continue be a source of third-party fraud against corporations in 2025.
Crime loss can still be due to old fashioned impersonation, however, as we saw in the case of much-loved British cheese distributor, Neal’s Yard Dairy. In October 2024, Neal’s Yard Diary sadly fell victim to a fraudulent buyer posing as a legitimate wholesale distributor for a French retailer, with over £300,000 worth of artisan cheese being delivered to fraudsters before they discovered that the buyer was a fraudster. This incident highlights vulnerabilities within supply chains, even for well-established businesses like Neal’s Yard. It also underscores the importance of rigorous verification processes and employee vigilance to potential fraud schemes, targeting high value goods. We hope they had a crime insurance policy to support them through this unfortunate event!
2024 Wrapped
Wrapping up on the remainder of our 2024 predictions, we predicted that a “Major Corporate Scandal Could Expose NEDs”. There were many insolvencies over the course of 2024 but one large scale corporate collapse which sticks out is the case of ISG.
ISG, was a large UK construction firm, which entered administration in September 2024, leading to the loss of 2,200 jobs. The former CEO stated that the situation had arisen due to “legacy issues” relating to “large loss-making contracts” secured between 2018 and 2020. This led to many commentators drawing parallels to the Carillion collapse in 2019, which we unpacked here in our D&O Files series. These parallels may well be premature, but we will be watching to see what unfolds as the insolvency process plays out into 2025.
Our final ‘Wildcard’ 2024 prediction was that there would be an “Unprecedented Space Debris Catastrophe with Devastating Effects Exposing Corporates”. Well, we are very pleased to announce that this did not happen, but note that space debris continues to be an area of concern for those involved in space travel and satellites. So much so that the European Space Agency recently began talks with SpaceX about the possibility of joining an international charter designed to reduce an increasing amount of debris in space. Elon to the rescue!
In summary, 2024 has been a year of change, and full of fascinating developments across the globe impacting management liability.
As elections have taken place across the world, several key figures have come and gone, setting a new tone for 2025.
With this in mind, watch out for our 2025 predictions…