Companies seek stronger shelter from D&O storm

Concerned about potential litigation and regulatory investigations, a growing number of companies are seeking more directors and officers (D&O) coverage, according to a Towers Watson survey released today.

D&O insurance protects the directors and officers of an organization against losses in case they are sued for their actions overseeing the organization. According to the survey, 21% of respondents are increasing policy limits, vs. 12% in the prior survey, in 2008. Meanwhile, only 3% seek lower limits.

“Clearly, companies are reacting to the fact that D&O liability exposures facing directors and officers are arguably at an all-time high,† said Larry Racioppo of the executive liability group in Towers Watson’s brokerage business. “Insurance buyers continue to be threatened by an ever-expanding litigation environment and have an increased awareness over regulatory issues they might encounter.†

Here’s what might be on their minds:

Three separate surveys follow class actions and similar filings as a way to benchmark D&O trends – Advisen, NERA Economic Consulting and Stanford Law School/Cornerstone Research. (We touched on NERA’s results a couple of months ago.) They all have their own methodologies, so while the numbers don’t synch up, the overall trends do. They show:

  1. The number of federal securities class actions increased slightly in 2010. NERA estimated an 8 percent increase, while Stanford/Cornerstone pegged it at 5 percent. (Advisen’s counting method makes an apples-to-apples comparison difficult.)
  2. Settlement values are rising. NERA, for example, set the median settlement at $109 million, passing the previous record of $80 million in 2006.
  3. The number of filings in the second half of the year accelerated. Stanford/Cornerstone, for example, counted 104 filings in the second half of the year, 44 percent more than the first half.
  4. Filings related to the credit crisis fell. Filings related to mergers and acquisitions rose, as did shareholder derivative lawsuits (actions brought against the board by shareholders, on behalf of the company). Advisen counts 335 M&A lawsuits last year, vs. 107 in 2006. Two years before that, there were 18.

Plaintiff attorneys also are aggressively pursuing M&A cases, recognizing that “companies often are willing to quickly settle suits that threaten to hold up a deal,† Advisen said in a separate analysis of the M&A phenomenon.

Stanford Law Professor Joseph Grundfest looks at Cornerstone’s M&A numbers and added : “Plaintiff lawyers are scrambling for new business as traditional fraud cases seem to be on the decline. There is little reason to believe that this trend will reverse or slow down; if anything, plaintiff lawyers may well bring an increasing percentage of these claims in federal court in an effort to control the litigation and to share in any fees that might result.†

The studies also report that securities litigation has been rising outside the United States in recent years. That may help explain why, in Towers’ survey, nearly half (47%) of the international companies surveyed purchased a local D&O policy in a foreign jurisdiction. Two years earlier, only 2% had.

The larger the company, the more likely they were to buy.

As always, the go-to site for D&O developments is Kevin LaCroix’s D & O Diary. His analysis of last year’s numbers appears here.

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