Insurers weigh future claims after SPAC boom

Directors and officers liability insurers are likely to face more lawsuits just based on the sheer number of special purpose acquisition companies that went public in the United States last year.

SPACs, also called blank check companies, are publicly traded shell companies formed to raise capital to acquire a private company, which they usually have two years to do after their initial public offering.

A de-SPAC transaction occurs when a private company merges with a SPAC. In the next step, the merged entities operate as a public company.

While SPACs have been around for decades, their growth last year was explosive. The 613 completed last year, raising $162.4 billion, compared with 248 in 2020, raising $83.3 billion, according to SPACInsider. 

Meanwhile, the U.S. Securities and Exchange Commission has made clear its interest in further regulating the SPAC market (see related story).

Experts say the D&O situation is complex, with three coverage towers potentially involved — the SPAC, the target private company and the newly merged entity — which raises the issue of risk accumulation. 

There are a handful of insurers offering primary and excess layers for SPAC risks, most prominently American International Group Inc. and Axa XL, a unit of Axa SA, and some experts expect more to enter the market.

Larry Fine, New York-based management liability coverage leader for Willis Towers Watson PLC, said SPACs typically have about a $5 million retention, and deSPACs’ retentions can start at $10 million. 

Insurers are stepping back and looking at the market “a little bit more skeptically or judiciously,” said Brian Dunphy, senior vice president and managing director at Alliant Insurance Services Inc. in New York. 

The risks are unknown with regard to the target, when the business combination is expected to take place, “and what the prospect for any potential litigation is after that,” he said.

Andrew Doherty, New York-based national executive and professional risk solutions practice leader for USI Insurance Services LLC, said, “They’ll still be underwritten very carefully, and I think it’ll still be a more limited marketplace and be more expensive” with higher retentions.

“We’re looking at the deSPAC space a little bit closer” because they are “grounded in more of the traditional principles that we’re used to underwriting” compared with SPACs, said Matthew Azzara, North American head of management liability commercial business at Allianz Global Corporate & Specialty, a unit of Allianz SE, in New York.

Tom Neufeld, Boston-based east regional product leader, corporate public, financial lines at AIG, said, “There’s an overriding sense there may not be 600-plus companies out there in the marketplace that are worthy of investing in at this point in time.”

Erin McGinn, Hartford, Connecticut-based vice president, claims, professional lines, for Axa XL, said of the industry, “It’s going to be a big year (for claims) where the rubber’s really going to meet the road on what the SPAC claims are worth” and whether they will survive or “fizzle out.” She added, however, that “this is not some massive financial bomb that we’re all sitting on.” 

SPACs can be considered vulnerable because of how they operate. They typically must make an investment within two years for sponsors to get a return on their investment, even if the deal is a bad one. “Otherwise, they have to hand all the money back,” said David M. Kroeger, a partner with Jenner & Block LLP in Chicago. 

Concern about risk aggregation because of the multiple towers involved is causing a pullback in capacity, said Derek Lakin, New York-based senior vice president and national SPAC practice co-leader for Lockton Cos. LLC.

Insurers are focused on the deployment of capacity on all three segments of the market “and potential litigation could impact all three of those programs,” said Kristin Kraeger, Boston-based managing director at Aon PLC. “That dynamic is not going to change.”

There were 31 SPAC-related securities class lawsuits filed in federal court in 2021, with nine of those involving the electric vehicle industry, according to Kevin LaCroix, executive vice president in Beachwood, Ohio, for RT ProExec, a division of R-T Specialty LLC. One was also filed in mid-January of this year.

In January, Delaware’s Chancery Court issued a ruling in In re Multiplan Corp. Stockholders Litigation, in which it refused to drop charges filed by stockholders who challenged the SPAC’s structure.

“The litigation is this big unknown” and “an expensive proposition to be wrong on,” said Bill Dixon, Edison, New Jersey-based Amwins Group Inc. group executive vice president and group practice leader, professional lines. 

However, Mach Millett, Boston-based SPAC and de-SPAC practice leader for Marsh LLC, said, “I don’t see this as a crisis point” in litigation. 

“I see this as opportunistic activity by the plaintiffs bar,” he said, adding that most of the litigation is in its early stages, with “no real activity” by the courts in terms of determining whether the lawsuits will continue or their severity.