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Uptick in SPAC lawsuits could spark more D&O price hikes


The number of lawsuits associated with special purpose acquisition companies that could trigger directors and officers liability claims is expected to increase and could lead to further hardening in the D&O market, experts say.

While still few in number, SPACs lawsuits are being filed at a higher rate than other securities cases and concern about SPACs is already affecting pricing.

SPACs, also called “blank check companies,” are publicly traded shell companies formed for the purpose of raising capital to acquire existing businesses and usually have two years to make an acquisition after their initial public offering.

A de-SPAC transaction occurs when a private company merges with a SPAC as an alternative to having its own initial public offering or combining with a traditional company. In the next step, the merged entities operate as a public company.

The process is often seen as a less costly and cumbersome way of taking a company public.

SPACs underwent explosive growth last year, with 248 initial public offerings in 2020, compared with 59 in 2019. As of June 2, there were 330 in 2021, according to the SPACInsider.

“There’s a tremendous amount of capital looking to access the capital markets,” and people have used the SPACs to access that opportunity, said John C. Marchisi, national director, SPAC segment, for Arthur J. Gallagher & Co. in Miami.

Experts say SPAC activity has seen a temporary lull because of statements made by the U.S. Securities and Exchange Commission, which is considering new rules to address concerns around material disclosures and investor protection.

“They’ve thrown some cold water” with their statements, said Kevin LaCroix, executive vice president in Beachwood, Ohio, for RT ProExec, a division of R-T Specialty LLC. 

But there are still numerous SPACs in the pipeline, and activity is expected to resume, experts say.

“We are seeing, certainly, increased litigation around SPACs,” said Kristin Kraeger, Boston-based managing director at Aon PLC.

But the lawsuits are “kind of an unknown” factor in terms of whether they will survive motions to dismiss, and underwriters are “factoring that into their pricing,” she said.

Mach Millett,  Boston-based SPAC and de-SPAC practice leader for Marsh LLC, said, though, that the predicted avalanche of litigation related to SPACs has not materialized. There have only been 14 de-SPAC securities class actions this year, which is a small percentage of the total.

The rate at which SPACs are being sued, however, is higher than the rate of overall class action securities litigation “and that’s a pretty telling metric, that indicates for us there’s going to be potentially a continued rise in the number of cases and rates at which it’s happening,” said Nirali Shah, New York-based FINEX U.S. IPO leader for Willis Towers Watson PLC.

That leaves the issue of how this will impact D&O rates.

Priya Cherian Huskins, San Francisco-based partner and senior vice president at broker Woodruff Sawyer & Co., said the D&O market is more stable than it was a year ago. Prices are high, “but we’re not seeing it continuing to increase in a dramatic fashion as we did this time last year.”

However, concerns are rising about the effect of SPAC litigation on pricing. In the past quarter, there has been a divergence in pricing between traditional IPOs and de-SPAC transactions, with the latter being charged a slightly higher premium, she said.

“We are seeing what I would describe as a flight to quality” in terms of insurers working with seasoned managements and boards, Ms. Kraeger said.

“It’ll be interesting to see if we continue to see more carriers actually jump into the D&O space, which will help with pricing and the terms and conditions being offered” and relieve current pressure, Ms. Shah said.

“It’s hard to predict how the market will react” to litigation, said James Rizzo, New York-based underwriter for U.S. executive risk for Beazley PLC.   

“It’s easy to imagine some capacity will retrench,” which will put pressure on pricing.  But the insurance industry is resilient, he said, and he expected new entities to enter while those already in the market such as Beazley “will stick it out.”

Experts say complicating the situation there are three parties whose D&O coverage could be tapped in litigation – private companies, SPACs and entities that have gone through the de-SPAC process, which creates potential aggregation issues for insurers.

“The number of policies that could be exposed in this situation” is concerning, said Jacalyn Kroupa, Denver-based senior vice president at CAC Specialty.