Lawsuits and enforcement actions that could trigger coverage under a D&O policy fell for a third consecutive year overall but remained elevated compared with the years prior to the financial crisis, Advisen data show.
While this poses “a descriptive dilemma,” said Kevin LaCroix, executive vice president of RT ProExec, filings are “reverting to normal levels after the extraordinary and temporary uptick seen during the financial crisis.”
Speaking at Advisen’s 2014 Wrap-up D&O Claims Trends Webinar, LaCroix cited a 17 percent decline in shareholder derivative filings, or lawsuits brought against directors and officers by shareholders, creditors and boards of directors on behalf of the company, as another example of the glass half full-or-empty scenario.
These filings, tracked only by Advisen among major analytic firms, fell to 164 in 2014. The figure is 30 percent below the 10-year average of 233, but that level is “arguably inflated by options-backdating cases between 2006 and 2008,” LaCroix said.
In fact, excluding filings under the Foreign Corrupt Practices Act and capital regulatory actions, Advisen data show an across-the-board decline in 2014 filings for major categories of securities-related suits that impact the underwriting and placement of management liability insurance besides ERISA. The trend is unusual historically.
“More typically, plaintiff firms reallocate resources to different types of litigation to respond to changing conditions,” Advisen said in a report accompanying the webinar. “It appears that those resources are possibly being allocated outside the realm of D&O litigation.”
Steve Shappell, chief legal officer of JLT Specialty, said the shallowness of the declines were “concerning,” though, in the context of market trends.
The figures “appear on their face a tick down,” but given that financial markets are performing well, the “frequency remained pretty robust, when you factor out the financial collapse of [2008] and you look at the historic norms,” he said.
Kathryn Walker, second vice president at Travelers, said the stable markets of the past few years—“expanding or sideways”— nevertheless supported a decrease in claims.
“I’m not surprised to see derivative lawsuits decline along with securities class actions, as they tend to tag along,” she added.
Lawsuits and enforcement actions that could trigger a D&O policy fell for a third consecutive year
Advisen data show that, in addition to SCAs falling 3 percent in 2014, securities-related breach of fiduciary duty suits dropped 73 percent, securities individual actions fell 51 percent and merger objections suits declined 25 percent.
Of the litigation to rise, those brought under the Foreign Corrupt Practices Act jumped 57 percent to 11 filings in 2014 in 2013. Capital regulatory actions, which represented just over half of all 2014 D&O litigation in 2014, rose 6 percent to 693.
The increases show that the Securities and Exchange Commission and the Dept. of Justice are “focused on financial fraud, something we’ll probably continue to see” in 2015, Walker said. “It’s been remunerative, if nothing else.”
Capital regulatory actions, which rose eight percentage points to 52 percent of total filings last year, also accounted for the highest average settlement, at $31.8 million. FCPA cases had the second-highest value, at $26.6 million.
“Increased regulatory attention to corrupt practices both in the US and worldwide is a trend worth watching,” Walker said, adding that settlements seen in the past year are “eye-popping.”
These included a $772 million settlement with Alstom SA and other large settlements with Avon Products and Weatherford International, Advisen data show.
The FCPA, enforced jointly by the SEC and the DOJ, has both anti-bribery provisions and accounting or “books and records” requirements, and is part of a global clampdown on corruption.
LaCroix pointed to the massive investigation of allegations of corruption at Brazilian oil company Petrobras, which has spawned a securities class action suit by holders of its American depositary receipts, bought on US exchanges.
“You have a non-US company being investigated by a non-US regulator, involving conduct outside the US, but you still have a US securities lawsuit,” he said. This could portend liability for US companies operating overseas.
“The targets in those other countries might not just be non-US companies, they could by US companies,” he said.
Kathryn Walker said that while insurance doesn’t cover criminal acts committed under the FCPA, coverage can be triggered by follow-on civil litigation, such as shareholder derivative lawsuits. Some of these suits have made use of the 1970 Garner doctrine allowing shareholder access to books and records, including confidential communications between officers and attorneys, a trend that could expose privileged documents to broader scrutiny, she said.
Steve Shappell said the question of whether costs associated with the “full-blown discoveries” triggered coverage was creating friction between carriers and clients.
He also said the frequency of IPOs last year, along with suits alleging failure to disclose information related to stock-drops, pointed to more of same in 2015.
The cases are popular among plaintiffs attorneys, because they require establishment of material misrepresentation rather than intentional fraud, he said. Fewer of them are dismissed, and “the median IPO settlement is almost double” that in a 10b5 or securities fraud case.
