D&O Litigation and Environmental Responsibilities

By   July 20, 2015

D&O coverageDirectors and Officers (D&O) are being put on the spot with recent litigation in regards to the alleged environmental risks that are by companies. Experts warn that risk managers ought to make sure that the T&C (terms and conditions) of the company’s environmental D&O coverage is enough to protect board directors and top executives from possible shareholder litigation.

Jacksonville, Florida, federal court filed a lawsuit in April against Jacksonville-based Rayonier Advanced Materials Inc., including its D&O, alleging that there was not adequate information disclosed to investors in regards to the environmental remediation from the specialty fiber maker.  Formerly a unit of Rayonier Inc., Rayonair Advanced Materials was handed over to shareholders last year.

The suit followed Rayonier Advanced Materials Inc. announcement that it had increased their environmental reserves by almost $70 million for disposal operations.

In addition, Duke Energy Corp. out Charlotte, North Carolina faces 5 shareholder derivative suits for the 39,000 tons of coal ash that was released in the Dan River in 2014.

There is also the Canadian case that alleges that a bankrupt aerospace firm’s former directors agreed to personally pay regulators through a settlement in another environmental case.

According to Arthur J. Gallagher & Co. senior vice president, Donna Ferrara, there can be significant differences in regards to the T&C of D&O coverage.  She went on to say, “There’s no D&O policy that is going to pay for the cleanup of a brownfield, but you may have coverage for a security claim and a shareholder claim … that says, “Board of directors, why did you make this great big mess happen,’ or “Why did you buy this brownfield?’”.

It is common practice for D&O policies to have exclusions according to Reed Smith LLP partner, Paul R. Walker-Bright, to claims for the discharge, dispersal or release of pollutants. He continued by saying “creates a potential avenue for insurance companies to contest coverage for claims against the directors or officers. We’ve seen that happen, so we think that it is very important for companies to be aware of that. It’s sort of a hidden trap door, if you will, that insurance companies can take advantage of, and your best defense against that is to try to negotiate better wording, or narrower wording, to avoid exactly that problem.”

Furthermore, it is said that remediation costs commonly are a part of pollution exclusions.