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D&O market expected to withstand litigation spike


Securities litigation against companies increased dramatically last year but is not expected to have a significant effect on the directors and officers liability insurance market, at least not immediately, experts say.

Kevin LaCroix, executive vice president of RT ProExec, a division of R-T Specialty L.L.C., in Beachwood, Ohio, said there were 415 securities class action lawsuits filed in 2017, the highest number of securities suit filings since 2001, when there were 498.

He said he anticipates that forthcoming reports by Boston-based Cornerstone Research Inc. and New York-based NERA Economic Consulting, which also track this data, will find a similar, if not precisely identical, increase.

According to Mr. LaCroix’s study, the number of 2017 securities lawsuit filings is about 120% higher than the 1996-2015 annual average number of filings of 188, and about 53% higher than 2016’s 271.

Mr. Lacroix said that of the 415 securities lawsuit filings, 193, or about 43%, were merger objection lawsuits. Merger objection lawsuits have moved to federal courts from Delaware following the Delaware Chancery Court’s January 2016 rejection of a disclosure-only settlement. 

Mr. LaCroix said even if the merger objection suits are disregarded, the number of traditional lawsuits, at 222, is still the highest since 2004, when 239 securities suits were filed. He noted as well that the litigation rate is increasing despite the shrinking number of publicly traded companies.

Meanwhile, “Obviously, there is a lot of litigation” against life science and high-tech companies, which is consistent with prior years, said Mr. LaCroix.

“What is slightly different” is a move away from lawsuits that charge financial misrepresentation, and more toward “event-driven lawsuits,” which are filed after “something bad happens in operations” that draws negative publicity, Mr. LaCroix said.

This litigation, he said, “seems to be the handiwork of a small number of smaller law firms, he said. “One thing that could stop” these firms would be if the “dismissal rate is unacceptable,” he said.

Mr. LaCroix also said the rate of litigation seems to have slowed over the course of the past year, so what has been seen “over the last several months and years may not carry out into 2018.”

Mr. LaCroix’s finding “will not in and of itself” affect the D&O insurance market, said Devin Beresheim, managing director and practice leader for Marsh L.L.C.’s financial and professional products specialty practice in New York.

He said insurers “have priced their way out of” the merger objection lawsuits by increasing retentions. “The insurers have done a good job of raising the deductible just enough to get themselves out of those paper-cut type of cases,” he said, referring to the relatively small amount for which these cases are settled.

Gary Phillips, New York-based executive vice president with Lockton Cos. L.L.C., said many merger objection lawsuit claims tend to be immaterial to primary insurers and do not have a substantial impact on the D&O market.

Pointing to the increase in traditional D&O lawsuits, however, Mr. Phillips said he believes this will eventually result in increased losses because “those claims tend to mature after three to five years.”

“The loss costs aren’t showing up yet, but you’re going to begin to see the impact of that over the next couple of years,” where insurers that thought that a $30 million attachment point was “safe” will find they were mistaken. “When those losses get on the books, we will probably see an impact on the market,” he said.

Renee Dube, Valhalla, New York-based vice president for the national property/casualty practice for USI Insurance Services L.L.C., said that while she expects continued competition in D&O pricing this year, an exception will be firms that either plan an initial public offering or have issued one over the past three years. They will have a “different story because of security claim exposures,” she said.