“This is an operational risk that’s not going to go away,” Amber Finch, a lawyer who negotiates insurance coverage for companies, told Reuters.
The risk is heightened by a California law set to take effect January 01. The law will require publicly traded companies headquartered in the state to name board members from underrepresented communities.
Insurers are focusing more on diversity following the murder of George Floyd by Minneapolis police in May. Since then, at least seven lawsuits have been filed against major companies that allege insufficient diversity practices, according to Reuters.
A September lawsuit alleged that Cisco Systems board members breached their duty by not having a Black director. Cisco released a statement that characterized the case as one of several identical lawsuits filed against US companies that already have what it said were “strong diversity and inclusion initiatives,” Reuters reported.
The price of D&O insurance has gone up over the last few years thanks to more lawsuits alleging widespread race and gender discrimination, sexual harassment, or general corporate malfeasance. A 2018 Supreme Court decision allowing some securities lawsuits to proceed in both state and federal courts compounded the issue, according to Reuters.
Tricia Melley, head of North America professional claims for AXA XL, told Reuters that the recent lawsuits were a concern.
“It’s something that we’re going to have to watch,” she said.
AmTrust Financial Services exec Jim Seymore, whose division writes D&O coverage, told Reuters that the insurer has also been meeting with its corporate clients to find out about their diversity practices.
Insurers also want to know which directors are retiring and the companies’ plans to replace them, Christine Williams, head of Aon Plc’s financial services group, told Reuters. Insurers want companies to use recruiters and human resources teams to vet a large pool of candidates, rather than relying solely on inside organizational charts, she said.
“The concern is around the lack of diverse leadership and how you’re impacting the company when you go down the ranks,” Williams told Reuters.