Could Your D&O Policy Require Better Diversity Practices?

Could Your D&O Policy Require Better Diversity Practices?

On Behalf of | Dec 2, 2020 | Employment Issues For Employers |

After the nationwide and international protests spurred by the death of George Floyd, at least seven lawsuits were filed against major American companies alleging that their diversity practices are deficient. For example, shareholders at Cisco Systems Inc. sued the board claiming that it had breached a duty by failing to have a single Black director.

Awards in cases like these are often paid by insurance companies. Specifically, directors & officers (D&O) liability insurance protects company officials from being held personally liable for suits brought by employees, investors, vendors, customers, competitors or other parties.

In addition to the diversity-based lawsuits at Cisco and at least six other companies, employees have been increasingly filing lawsuits alleging widespread race discrimination, sex discrimination, sexual harassment and other corporate malfeasance.

With the perceived increase in lawsuits over diversity practices, D&O insurance companies are taking measures to reduce their exposure. They are now asking for details about employee recruitment, succession planning and other issues related to diversity. Only when they have those details are the insurers wiling to write and renew policies.

In the past, the insurers relied primarily on proxy statements and other public documents to determine whether a company was at risk of a diversity-related lawsuit. No longer.

Now, insurers are asking detailed questions about which board members, specifically, are slated to retire and who they will be replaced with. They are hoping to see companies make an effort to recruit from a broad pool of candidates when hiring, rather than primarily promoting from within.

“The concern is around the lack of diverse leadership and how you’re impacting the company when you go down the ranks,” said a spokesperson for Aon PLC.

Does your company have a diversity plan?

It’s easy to assume your organization is doing fine in terms of diversity, but your D&O insurer might not see it that way. One way to pass muster is to have a robust, detailed diversity plan.

Consider focusing on increasing diversity as a value when you plan for employee recruitment and promotions, board membership and succession planning. That said, avoid engaging in specific, race- or gender-based quotas, which could be viewed as another form of discrimination.

It is important to realize that your lack of diversity in personnel and leadership could put you at risk of a lawsuit. Sit down with your employment law attorney right away to get started on a diversity plan.