Insight and Evolution
Dear friends of Rising Edge,
Here again with our latest Insights looking at a few of the significant emerging issues we’re seeing at the start of 2024.
Best wishes, Max Clapp,
Assistant Underwriter, Rising Edge.
Building Safety Act 2022 is adding further pressure to the construction and real estate sectors.
The Building Safety Act 2022 (BSA) was passed in April 2023, and with duties applying to Ds&Os coming into force now, we expect to see the implications from a D&O liability perspective materialise during 2024. The act reforms building safety legislation and is the result of government recommendations following an independent review into high-rise residential building safety, following the Grenfell Tower disaster.
The BSA applies to new or existing occupied buildings over 18 metres high or seven stories tall, including those with at least two residential units. Such buildings must adhere to specific design and construction requirements, extending to care homes and hospitals meeting this height threshold. It aims to trigger a transformative shift in the building industry’s culture and accountability, prioritising residents’ safety within higher-risk structures. By establishing clearer standards and guidelines, it delineates responsibilities for fire and building safety throughout the entire lifecycle of such buildings.
The significant alterations and fresh requirements carry substantial implications for D&O liability within the construction and real-estate sectors. Section 161 of the BSA broadens accountability to executives and managers who authorise, participate in, or through negligence contribute to violations of specific obligations outlined within the Act. There is also a striking shift in the penal system for contraventions of building regulations: previously those who breached building regulations were subject to a capped fine of £5,000, but following the BSA they may now receive an unrestricted fine and a potential prison sentence of up to two years. With the newly former Building Safety Regulator stating its intention to investigate allegations of non-compliance with the rules, we expect to see a increased D&O claims frequency and severity in these sectors.
Another noteworthy headwind in this sector from a D&O liability perspective is the number of insolvencies. The construction industry is currently experiencing the most insolvencies of any industry in the UK. When insolvencies occur, the prior conduct of Ds&Os is often scrutinised, and claims can come from a variety sources including from the regulators, creditors, and employees . Having appropriate D&O coverage ought to be a top priority for firms in this industry, as they navigate such a challenging operating environment.
Upcoming decision in the Purdue S11 bankruptcy proceeding has the potential to shift directors’ immunity landscape in the U.S.
For directors and officers in U.S., this is single most important bankruptcy decision to reach the Supreme Court for 30 years.
When a company files for bankruptcy, the company itself is in Chapter 11, not its shareholders or its directors and officers. Therefore, it is the company itself that gets a discharge, and a release from certain claims and creditors when it emerges from bankruptcy, not the directors. Over the past 30 years, a trend has developed whereby bankruptcy courts authorise third party releases in ‘exceptional circumstances’. In these cases (normally large and complex), directors get the benefit of a Chapter 11 release, without having to file for bankruptcy, and they get it by providing what is called a ‘substantial contribution’.
Purdue Pharma, which was owned principally by the Sackler family and their descendants, sought Chapter 11 bankruptcy protection in 2019 to address its debts. The majority of these debts stemmed from a plethora of lawsuits claiming that OxyContin, a drug which Purdue sold, played a pivotal role in initiating the opioid crisis.
In Purdue’s bankruptcy settlement, which was approved by a U.S. bankruptcy judge in 2021, Purdue would provide $10bn in value to victims of addiction, hospitals, state and local governments, and others who have sued the company and its executives. Part of this settlement included such a ‘substantial contribution’, in this case up to $6bn, from the Sackler family. In return, the Sacklers were released from all liability relating to their ownership and operation of Purdue. The vast majority of creditors consented to this but not everybody. Despite the objection of some creditors, the lower bankruptcy courts approved this arrangement as a ‘non-consensual third party release’. This lower court decision was appealed, and this construct, that provides releases to a third partier such as directors, is now squarely before the U.S. Supreme Court.
We await the decision of the court with interest. If the court rules that these arrangements are not permitted under the U.S. Bankruptcy Code, and that the bankruptcy courts do not have jurisdiction to enter such a release, it would potentially unwind the Purdue Pharma plan. It could also have wide-ranging ramifications for the resolutions of these kinds of cases, for directors and officers, who often depend on these releases, and the insurers sitting behind these plans.
Regardless of the court’s ruling, it remains likely that parties will continue to explore creative strategies to limit liability for non-bankrupt parties in mass tort cases, potentially prompting further legislative scrutiny of bankruptcy laws.
Evolving; Products and Careers
Since our previous newsletter, quite a bit has been happening; the signs of an ever-changing world. The D&O risk environment keeps evolving; through a combination of new regulations that impacts Directors’ duties, and therefore liability exposure, and of new case law showing that the reality of these duties can bite.
Evolution is also about challenging the status quo at every step, every moment. Trying to make things better. Seeking innovation that will make a difference. And we are very pleased with the market reception of our latest new product: NED Protect. Something to nicely complement the traditional and effective ABC D&O policies. With a twist to bring peace of mind to NEDs and enable Companies to attract the best of them. Have a read there, and tell us what you think. Or better – try it by asking for a quote!
Photo by Daniel Tuttle on Unsplash
Last, evolution is also about learning and developing – and in this instance, we are extremely saddened, but also extremely proud to see Max, our Rising Edge Insight Editor in Chief and talented Junior Underwriter, leaving Rising Edge to get the taste of what it is to work for a larger financial institution, and to explore the intricacies of a different line of business. But proud we are indeed. When Max joined us in 2021 fresh out of his graduation and still dazzled from the Covid-era, just as we were launching Rising Edge, we had set ourselves on developing talent. Max is the first of what we aim to become an underwriting talent factory! Max – thank you for all your contributions and for your personality; you will be successful, and we are wishing you well!
Philippe Gouraud
CEO, Rising Edge.
