Advisen Loss Insight: Enforcement, litigation and D&O coverage

By Rebecca Bole on June 3, 2015

Advisen data found that litigation filings and enforcement actions that could trigger coverage under a D&O policy decreased 9 percent in the first quarter 2015, from a year earlier, and 11 percent from Q4 2014.

These events include capital regulatory actions and securities class and individual actions, as well as breach of fiduciary duty, merger objection and derivative lawsuits.

The number of actions has been falling steadily since 2011, and is predicted to fall further by the end of this year. These figures are annualized.

Decreases, however, were not across the board. Of the major case types, year-over-year (Q1 2014 vs. Q1 2015) derivative shareholder actions fell 60 percent year-over-year to Q1 2015, merger objections dropped 45 percent in that period but securities class actions fell just 2 percent.

Conversely, the following groups grew in the year to Q1 2015: capital regulatory actions were up 20 percent, securities individual actions up 40 percent and foreign corrupt practices act cases doubled (100 percent).

So, what does the picture look like in Q1 2015? Capital regulatory actions, accounting for almost two thirds of total filings, remained the leading source of events in the first quarter.

Securities class actions were a distant a second at 14 percent, followed by merger objections, at 11 percent.

The average settlement cost for all case types, including proposed and tentative settlements, was $128 million, more than double the $62 million reported in Q1 2014, and three times the $37 million average in 2014.

On average, capital regulatory actions were the most significant source of large loses at $155 million, on average.

This talk of regulatory actions leads me to another trending story–that of an increased SEC interest in whistleblowers.

In April, the SEC made two especially significant whistleblower-award payments, taking the total so far to more than $50 million given to 16 individuals since the program began in 2011.

In its first maximum award allowable under the program, the SEC gave 30 percent, or $600,000, of the money collected in the Paradigm Capital Management case to the whistleblower. Individuals who furnish the commission with high-quality original information leading to an enforcement action in which more than $1,000,000 in sanctions is levied can receive from 10 to 30 percent of the money.

Also in April, the SEC made its first-ever enforcement action against a company for potentially stifling the whistleblowing process.

Houston-based firm KBR Inc. was charged a $130,000 penalty for violating protection rules under the Dodd-Frank Act by using improperly restrictive language in confidentiality agreements that had the potential to stifle the whistleblowing process. The wording required witnesses in some internal investigations to sign statements warning that they could be disciplined for discussing them with outside parties.

SEC Chair Mary Jo White’s financial fraud task force is clearly receiving plenty of leads that will contribute to an increase of actions in this area.

Since these types of claims typically take up to four years to resolve, there is a high probability that the number of actions in this category will continue to grow in coming years.

Rebecca Bole is EVP & Editor-in-Chief at Advisen. She has nearly 20 years of experience in the international insurance markets, both as an underwriter and a journalist. Contact Rebecca at rbole@advisen.com.