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8 February 2018

Tough At The Top: Changing Risks For Mining Executives FOO

Tough At The Top: Changing Risks For Mining Executives
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2017 was a startling year for Directors’ and Officers’ (D&O) insurance claims. At times it felt as though entire industries were in the legal spotlight.

Based on the claims activity seen in the D&O insurance market during the course of the year, class actions ended 2017 at an all-time high; with investigations and actions from regulatory bodies becoming increasingly onerous and costly to defend. Within this environment, mining companies do not appear to be immune from this new normal. Directors must take steps to protect the company’s balance sheet and themselves, personally, from lengthy and expensive legal claims.

In the past, the main exposure for mining companies from a management liability perspective were class actions or claims against a company for breaches in health and safety, or for pollution and contamination incidents. For those miners listed in the US, shareholder actions were a particular concern; legal claims have been many and varied, but often revolving around changes in share value and profitability. In 2017, this changed; virtually every aspect of a mining company’s operations these days are under immense scrutiny from regulators, employees, shareholders and the public. Mistakes are costly, and can result in a claim against the company as a whole or individual directors and executives.

Why are mining companies at risk?

The increase in class actions is to some extent a result of fallout from the global financial crisis. The vast array of litigation surrounding the crisis, particularly the surge in the number of investigation and enforcement proceedings during 2008-2009 against many major banks saw law firms expand their teams extensively to cope with demand. Revenues increased significantly during this time. In the UK, the top 200 UK law firms saw revenues increase by 73% from 2007 to 2017, with the total number of lawyers also rising by 44% in the same period1.

In addition, the financial crisis coincided with a gradual slowdown of commodities pricing for precious metals, most notably gold. The end of the commodities supercycle saw the share price value of many miners drop, as it became apparent that forward looking financial statements were largely based on an unsustainably high gold price. This led to a flurry of shareholder action suits against several major mining companies2. With many mining companies struggling to stabilise their balance sheets as a result in the fall of commodity prices, the sector became a more viable target.

Today, capital intensive sectors, such as mining remain targets for legal action. In 2017 Katanga Mining, Rio Tinto, Tahoe Resources, Asanko Gold, Barrick Gold and Northern Dynasty Minerals were all subject to class actions. This is a historically high percentage of the USA listed miners. These class actions rarely disappear entirely, despite the fact that virtually none make it to trial proceedings. Once these actions make it through the motion to dismiss, they can still last many years and can be extremely costly to defend and settle.

Which mining activities tend to result in legal action?

Health and safety and polluting or contaminating activities remain in sharp focus for the mining industry in respect of potential legal action. Any serious accident or death at mine site inevitably results in an investigation by a local governmental body (such as a regulator) and often, the surrounding media attention generated by the incident can then lead to other third parties, such as trade unions, taking a much closer interest in the case.

Increasingly, we are seeing individual executives investigated, with some being prosecuted in the worst case scenarios. The deadly collapse of the Samarco iron ore mine tailings dam in late 2016 in Brazil led to legal claims running into tens of billions and the company executives having charges of manslaughter filed against them following the 19 fatalities and the extensive environmental damage that occurred as a result of the dam failure. A subsequent class action case in the USA was also filed, demonstrating the serious and far reaching legal impact as a result of a major environmental incident.

Regulators are certainly more active than in the past. These give rise to the most alarming and difficult claims. Their investigations can be civil or criminal, conducted in public but moreover tend to be private (note that this in itself causes issues with notification of the claim to D&O insurers). The most frequent subject of these investigations is public disclosures, bribery and corruption. Once the investigation becomes public knowledge, it is relatively common for a class action to follow. These claims can run into hundreds of millions in legal costs and settlements.

What do underwriters look for when insuring mining companies for D&O risks?

When faced with this increase in exposure, D&O insurers are looking very closely at their potential exposure beyond their usual underwriting parameters. The coverage offered, and the rate, will vary considerably from company to company depending on the specific risk profile of the underlying insured company. When considering a mining risk, an underwriter will pay particular attention to whether the company is listed, and the jurisdiction of the listing.

Those companies listed in the USA, Australia and Canada will be flagged as potentially representing higher risks. An underwriter will also pay particular attention to the nature of the operations themselves; country, the political risks, ownership structure, project stage, committed capital expenditure and sunk costs, commodity and potential mergers and acquisition activity.

Those larger miners with plans for a large or world-class ‘marquee’ mine will inevitably face more questions from underwriters about the operating and financial potential of the mine as these marquee mines have historically been plagued by cost overruns and can be a huge burden on the company’s balance sheet if they do not produce the expected return on the investment.

All of these factors will have an influence on the insurer’s appetite and subsequent terms and conditions. Should the insurer deem the risk too great then obtaining cover can be difficult without the support of a specialist Management Liability (D&O) broker. Ahead of capital raisings, IPOs, and major mine developments, this is the time to refine the way in which a risk is presented to the insurance market to ensure robust coverage is secured in a timely fashion.

This claims environment for mining companies is unlikely to change in the short-term, and recent settlements have only encouraged investor actions should there be actual or alleged acts that can be tied to financial loss. As long as the regulatory investigations continue, subsequent ligation will likely follow. In this difficult insurance market it is imperative to have the right service-orientated brokers that have extensive experience in placing insurance and settling claims, and used to helping and advising mining companies at every stage of development and across the mine lifecycle.

Gallagher’s D&O team will design a Directors’ and Officers’ policy that precisely matches your mining company’s exposure. We then look for capacity only from insurers where we have confidence in their mining sector experience, with a strong financial position, and proven commitment to paying out claims. We also ensure that we select those insurers that take a long, strategic view of a client’s future risk profile.

1 https://www.ft.com
2 https://www.reuters.com

Changing risks for mining execs.pdf

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