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Q&A: Michael Klausner, Stanford University

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Q&A: Michael Klausner, Stanford University

Michael Klausner is the Nancy and Charles Munger Professor of Business and Professor of Law at Stanford University in Palo Alto, Calif. Mr. Klausner teaches and writes in the areas of corporate law, corporate governance, business transactions and financial regulations. Before joining the Stanford Law School faculty in 1997, he was a law professor at New York University School of Law, a White House Fellow and deputy associate director in the Office of Policy Development in the White House, and a corporate law practitioner with Gibson Dunn & Crutcher L.L.P. in Washington and Hong Kong. He discussed his research on securities litigation with Business Insurance Senior Editor Judy Greenwald. Edited excerpts follow.

A: Factors that lead to large settlements include financial restatements and parallel SEC actions; if there is a public pension plan or a union as a plaintiff; if the misstatement is made in the context of a public offering or an (initial public offering) or another offering; and if the plaintiff can show that the executive compensation arrangement led to larger compensation as a result of misstatement — that'll bump up the settlement as well.

A: I am not in the industry, but my understanding is that the claims management process uses data less than the underwriting process, and that the underwriting process involves more data now than it did several years ago. It's changing. Underwriting has become more of a science. There's more statistical modeling, I believe, than there used to be, just based on what people in the industry have told me, but there's still a lot of art to it. The statistical claims models that will indicate the likelihood and the size of a settlement are inherently imperfect, so a qualitative factor has to enter into the underwriting, even when data is heavily used.

A: The way these cases come up is that there's a misstatement in disclosure documents or in a filing with the SEC, so care in the disclosure process and in overseeing the disclosure process and in maintaining internal controls are all the ingredients to avoiding a misstatement. It may be easier said than done, but that's pretty much what's necessary.

Business Insurance's digital coverage of the 2013 Professional Liability Underwriting Society's international conference is sponsored by Ace. To view all the Digital Daily news and related content in its ideal form, use a nonmobile browser to visit www.businessinsurance.com/PLUS2013.