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Rise in foreign D&O liability lawsuits complicates risk management

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The number of directors and officers liability lawsuits filed by foreign shareholders in other countries, while still far smaller than the number filed in the United States, is expected to continue rising.

A key reason for the increase, some suggest, is the U.S. Supreme Court's 2010 ruling in Morrison et al. v. National Australia Bank Ltd. et al., which held that foreign investors who bought non-U.S.-based companies' stock on foreign exchanges cannot sue in the United States (see related story).

This means multinational policyholders must deal with many different laws. Countries where D&O liability cases are most likely to be pursued include Australia, Canada and the Netherlands, experts say.

“We are seeing a rise in international claims generally in the management liability area,” said Will Fahey, New York-based senior vice president in Zurich North America's management liability group. “We're also seeing our U.S. insureds incur claims from their international operations,” he said.

The Morrison ruling was “the decision heard "round the world,” said Ann Longmore, New York-based executive vice president of FINEX North America, a unit of Willis North America Inc. It had a wide impact almost immediately, “with cases being tossed out of U.S. courts” within weeks, she said.

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“The Morrison ruling was effectively a significant limitation on litigation where people in the U.S. could sue for causes of action that might more properly be brought in other countries,” said Thomas M. Sheffield, senior vice president with Marsh Inc.'s FINPRO unit in New York.

Morrison has encouraged litigants to be more experimental, and to try to see whether other alternatives can be pursued,” said Kevin LaCroix, an attorney and executive vice president at RT ProExec, a division of R-T Specialty L.L.C. in Beachwood, Ohio,

“There were a lot of forces moving in that direction before Morrison,” with efforts in Canada and Europe trying to make use of class actions, said Matthew W. Close, a partner with law firm O'Melveny & Myers L.L.P. in Los Angeles. “But those sorts of trends and developments and the globalization of litigation were given a real kick and jump-start as a result” of it.

U.S. companies are seeking to grow in China and other emerging markets where the government does not operate as it does here, and where the legal landscape is more uncertain, Mr. Fahey said. “I just think it's a reflection of the increased multinational risk profile of U.S.-based insureds,” he said.

But “we haven't seen extreme growth in securities claims in countries outside the United States,” said Lee Lindsay, Denver-based senior vice president at Aon Risk Solutions' Financial Services Group. “In large part, I think, they still don't have the same types of class actions in their civil laws that we have here in the United States, allowing class actions.”

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While some have class actions, “many of these are opt-in as opposed to opt-out,” she said. In the former, plaintiffs must indicate they want to participate in the litigation and the default is exclusion; in the latter, potential class members are automatically included unless they indicate otherwise.

There has been a steady stream, not a flood, of opportunistic or innovative plaintiff lawyers seeking to pursue claims “that in the past would have been filed in the U.S. but now, because of Morrison, are being pursued outside the U.S.,” Mr. LaCroix said.

“There's been a tremendous effort by a lot of investor groups and very talented plaintiffs lawyers to establish the ability to bring securities class action cases in Canada,” Mr. Close said. “These cases are really battlegrounds to see how the law will be shaped.”

The Netherlands, South Africa, and Australia have indicated they are open to securities class action claims, Ms. Lindsey said, though she doesn't expect to see tremendous growth any time soon.

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