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Cyber, crypto top D&O concerns as fears over spac claims ease

Posted On: Feb. 1, 2023 12:00 AM CST


Cyber and cryptocurrency issues are front and center in the directors and officers liability insurance market, while the heavy focus on special purpose acquisition companies of a year ago has waned considerably. 

Cyber “brings with it the possibility of huge exposures for officers if they’re getting their cyber process wrong,” said William G. Passannante, a shareholder with Anderson Kill P.C. in New York.

David M. Kroeger, a partner with Jenner & Block LLP in Chicago, noted, however, that “there have been some fairly prominent dismissals” of D&O litigation in this area, such as a Delaware court’s rejection of cybersecurity-related oversight breach claims asserted against SolarWinds Corp. following a 2020 hack.

Cryptocurrency could be another source of claims. 

In December, the SEC advised public companies to examine whether they need to disclose to investors any potential impacts from turmoil in the cryptocurrency industry.

Cryptocurrency “does present a big opportunity for carriers willing to get up to speed and understand better the risk, and what has gone wrong in the past,” said Larry Fine, New York-based management liability coverage leader for Willis Towers Watson PLC.

Meanwhile, SPACs, which had attracted plenty of attention in the D&O space, have moved out of the spotlight. 

Investors lost interest in the SPAC market last year because of a combination of rising inflation, interest rate increases and a proposed U.S. Securities and Exchange rule issued in March that would require additional disclosures and remove SPACs’ liability immunity with regard to forward-looking statements. 

This left hundreds of SPACs without public company partners with which to merge, but observers say this should not be a problem for the D&O market.

“By and large” the SPAC and deSPAC markets were “highly concentrated,” so their decline will not affect everybody, said Peter Taffae, a D&O liability insurance expert at Los Angeles-based wholesale brokerage Executive Perils Inc.

SPAC investors that have not found merger partners are likely to just accept a return of their investments, some experts say. 

“I don’t think a ton of claims would come from that,” unless, out of desperation, there was a merger “that did not make financial sense,” said Andrew Doherty, New York-based national executive and professional risk solutions practice leader for USI Insurance Services LLC.

Mr. Passannante, though, said those that did not get the substantial returns on their investments that they expected could file litigation.

A positive development for the D&O sector overall has been relatively flat securities class actions. There were 110 new securities class-action lawsuits filed in federal and state courts in the first half of 2022, which compared with the 107 filed in the second half of 2021, according to a report released by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse.

“It feels like a period of stability,” and there currently is no reason to expect the number of cases will spike or plummet, Mr. Doherty said.

Carolyn H. Rosenberg, a partner with Reed & Smith LLP, said, “I think you’ll continue to see a steady stream of securities-related litigation.”