Insurers for Executives Brace for Steep Claims Under Trump’s SEC

President-elect Donald Trump’s pick to police Wall Street and corporate America is poised to focus on enforcement actions against individual executives and to roll back Biden-era regulations, sparking more private litigation against companies and their leadership—and, often, leaving insurers on the hook.

“It’s potentially just open season on government regulation,” said Bradley Dlatt, a Perkins Coie attorney who represents corporate policyholders. He pointed to Trump’s promised deregulatory agenda under SEC pick Paul Atkins, as well as the US Supreme Court’s June decision in Loper Bright Enterprises v. Raimondo limiting the power of federal agencies to defend some rules in court.

“The result is someone’s going to have to step in to fill that void,” Dlatt said. “My expectation is that’s going to be plaintiffs’ lawyers, which means more litigation, more claims, more cost.”

At the same time, Atkins is likely to press ahead with traditional anti-fraud enforcement actions and to emphasize cases brought against individuals over sweeping penalties against companies.

The anticipated regulatory and enforcement trends in Trump’s second term could mean expensive claims across the board for directors and officers insurance, which Dlatt described as insurance for executives’ business judgment.

Top D&O carriers in the US include units of AXA SA, Chubb Ltd., and Berkshire Hathaway Inc.

SEC Shifts

The Securities and Exchange Commission under Atkins is expected to step back from the regulatory agenda championed by current Chair Gary Gensler that included climate change and cybersecurity disclosure requirements.

“But it’s not like they’re going to go away as a market policeman,” said Kevin LaCroix, executive vice president at insurance intermediary RT ProExec and author of The D&O Diary blog. “There still will be enforcement actions against fraudulent misconduct, but it will just be a change in emphasis.”

The new administration will likely dial up SEC investigations into more traditional forms of securities fraud, said Angelo Savino, Cozen O’Connor’s professional liability group chair. And the private securities bar may take a page out of the agency’s book, as it has in the past, by bringing follow-on suits, he added.

Those situations—where an SEC enforcement action is accompanied by a securities class action, leading to insurance claims in both categories—are “the most dangerous claims and where the biggest dollar loss costs come from,” according to LaCroix.

If claims ramp up, which Savino said is more likely than not, insurers may boost the premiums they collect to cover the rising costs associated with defending and indemnifying policyholders.

A potential uptick in SEC probes means corporate policyholders should ensure they have explicit coverage for government investigations, according to Dlatt. Vague language on whether a government subpoena is covered, for example, has led to coverage litigation in the past, Dlatt said.

Another key change with insurance implications is that Atkins is expected to place additional emphasis on sanctioning individuals instead of, or in addition to, merely fining companies.

Although individual employees are covered under D&O policies, that “generally means that there will be more costs of defense for the individuals, and therefore erosion of insurance coverage,” according to Savino.

Companies may also decide shore up their Side A coverage, a part of D&O policies that directly covers claims against directors and officers, Dlatt said.

Filling the Void

In general, attorneys predict Trump’s promise to roll back regulatory oversight will lead to a climate that encourages more risk-taking behavior by businesses.

As a result, the burden of corporate accountability may shift from regulators to private shareholders.

Corporate policyholder claims filed with D&O insurers resulting from government probes under Biden-era policies will likely drop off in Trump’s second term.

But those tied to private litigation are set to grow, Dlatt said, “particularly if we’re going to live in a world where civil litigation is going to be what’s necessary to keep companies in line.”

For example, there may be a rise in mergers and acquisitions as Trump’s antitrust enforcers back off from aggressively suing to block deals.

That will in turn lead to more of the private litigation—and resulting insurance claims—that typically comes with merger activity, Savino said.

Emerging Litigation Risks

Other risks will continue to drive securities litigation as well as D&O and other insurance claims, industry attorneys say.

Savino predicted there will be more private suits challenging environmental, social, and governance and diversity, equity, and inclusion programs at corporations “because they may feel that the climate within the government is more accepting of such challenges.”

Cyber risk also isn’t going away, warned Jonathan Meer, a partner at Wilson Elser who represents insurers.

“When there’s a breach, the trickle effect of business interruption claims from your vendors, third-party actions, state notification requirements, derivative claims” can have a huge impact on corporate policyholders, he said.

Any efforts under Trump to roll back cybersecurity rules will bring instability that may invite more litigation from shareholders seeking clarity, said Andres Avila, a Kennedys Law LLP attorney who represents insurers. Carriers will notice the cost across lines—not just D&O, but also cyber, commercial general liability, and property.

Securities litigation over artificial intelligence, including AI-washing suits targeting companies that oversell the impact of AI or downplay its risks, is also here to stay, according to LaCroix.

Any additional litigation should worry insurance companies that are already concerned about “social inflation,” Meer said, referring to insurers’ claims costs outpacing economic inflation. For policyholders, more litigation and claims will result in burning through coverage and hitting limits faster than before.

“Things are costing more in terms of judgments, sustainable verdicts, as well as settlements in connection with claims that are submitted,” Meer said. “That is going to remain without tort reform on the horizon on the federal or state level.”