When an independent emissions testing lab found inconsistencies between Volkswagen’s claims about the performance of its “clean diesel” engines and the actual emissions from those engines, the company dismissed it for months, insisting that the testers were at fault. Finally, in September, the truth came out: Not only were Volkswagen’s diesel engines not environmentally friendly, but the company had knowingly rigged the cars’ software to show better emissions results, setting consumers up for a fall on tax credits or subsidies for cars that were supposedly energy efficient.
Understanding the supply chain of a business is becoming more vital for insurers. The Volkswagen case drives that point home since the emissions cheating scandal touches so many links in that chain. While many different types of insurance protect those links, many losses won’t be covered because the company’s actions were deliberate.
Directors and officers (D&O) liability insurance is likely to take the biggest hit from Volkswagen’s actions, although that doesn’t mean other insurers are totally in the clear yet. Volkswagen itself is likely to be paying for its actions for a long time.
The company’s situation offers the opportunity for advisors to talk with their clients about the range of insurance coverages that could apply if those clients find themselves in a similar situation, or simply find themselves involved with a company that’s gone rogue.
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Insurance industry representatives declined to be interviewed or to respond to questions about specific insurance needs or what coverage limitations for a company in Volkswagen’s situation might be. However, reports have put the number at approximately $560 million annually for D&O coverage alone. Tony Galban, senior vice president and global directors and officers liability product manager for Chubb Group of Insurance Companies, did offer some clarification on D&O insurance.
Galban said via email, “D&O policies generally cover claims made against the directors and corporate officers for mismanagement, omissions, breaches of fiduciary or other ‘wrongful acts,’ as broadly defined. Claimants typically can be shareholders, regulators, customers, vendors or competitors. Shareholder claims typically assert that management has damaged the value of the company, and hence the value of their ownership; this can include areas such as brand and market reputation.” That certainly applies to Volkswagen, with shareholder suits already in the works.