D&O insurance tower likely most affected by Volkswagen scandal

By Chad Hemenway on September 23, 2015

About two weeks ago Volkswagen bragged about its sustainability. The car maker achieved a fantastic score from the Dow Jones Sustainability Indices.

In Volkswagen’s own words:

Sustainability has many different facets. Environment, social and economic criteria are the main issues that are extensively assessed in many individual sub-aspects as part of the Dow Jones Sustainability Indices (DJSI). Of the 33 global car makers, which are listed in this year’s ranking, Volkswagen took first place, scoring 91 out of a possible 100 points.

A glance at the individual results reveals that Volkswagen operates most sustainably among the car makers in the areas of codes of conduct, compliance and anti-corruption as well as innovation management, climate strategy and lifecycle analysis. The Group is also the benchmark in the industry with regard to supplier management and environmental reporting.

What a difference a couple of weeks make.

VW’s CEO just resigned following the recent discovery that the German carmaker rigged US emissions tests for its diesel vehicles by installing “defeat devices” in them. VW’s share price has dropped 30 percent this week.

The Environmental Protection Agency and the Department of Justice are investigating, as are state attorneys general and other countries, like VW’s home of Germany.

VW faces potentially tens of billions of dollars in fines and has already had dozens of federal lawsuits filed against it from VW owners who say their cars are now less valuable. Advisen’s MSCAd teams are making it a priority to enter cases into the database.

The company also faces a huge hit to its reputation and has set aside $7 billion to cover costs related to the scandal. There are nearly 500,000 of the affected cars on US roads and 11 million cars worldwide but using recall or product liability insurance may hit a wall, considering this was a deliberate act.

In terms of other insurance implications, we can look at several angles. Vehicle manufactures have done this before. Almost 20 years ago a bunch of truck manufacturers paid $1 billion for using defeat devices and Ford used the devices in its Econoline vans and paid a $7.8 million settlement for similarly violating the Clean Air Act. [credit to Wired for the research]

In terms of the consumer class-actions alleging a drop in vehicle value, we might look to Toyota Motors’ unintended acceleration issue of 2009-10. The car manufactured paid $1.1 billion to settle a class-action suit by car owners who claimed economic loss.

Volkswagen may also face additional litigation in Europe and China, where many cars owned are VWs.

From a management liability standpoint, there are several things to remember, said sources. Volkswagen is a German company. German law applies. Additionally, German companies are organized differently. They have a two-tier board structure: management and supervisory.

The fact this was an admitted intentional act by someone or a group of people at the carmaker does not exclude everyone from coverage. D&O policies discriminate and do not throw a blanket over the boards. Not everyone in the crosshairs may have had intent to cover up the emissions test, and these people will be covered. This may come into play, considering the DOJ recently said companies that want credit for cooperating with investigators should name those responsible for misconduct.

Is the Siemens corruption scandal of a decade ago a good barometer? (Advisen MSCAd related case #8154) Siemens violated the FCPA by paying bribes over many years to foreign officials in order to get business. While not exactly the same case as VW, like the carmaker, Siemens admitted to the misconduct. Multiple countries were involved. Siemens took a hit to its reputation and senior management resigned. It spent $1 billion on an internal investigation, cooperating with regulators.

In late December 2008 Siemens agreed to pay a total of $1.6 billion in disgorgement and fines—the largest amount a company has paid to resolve corruption-related charges.

A D&O claim was settled with insurers for 100 million euros (US$111.9 million). Siemens took out 250 million euros worth of D&O cover for its managers.

Chad Hemenway is Managing Editor of Advisen News. He has more than 15 years of journalist experience at a variety of online, daily, and weekly publications. He has covered P&C insurance news since 2007, and he has experience writing about all P&C lines as well as regulation and litigation. Chad won a Jesse H. Neal Award for Best Single Article in 2014 for his coverage of the insurance implications of traumatic brain injuries and Best News Coverage in 2013 for coverage of Superstorm Sandy. Contact Chad at 212.897.4824 or [email protected].