National Underwriter - April 16, 2012

D&O Uh-Oh: Large Class-Action Settlem
Rates are increasing—but so are government actions, defense costs, diversity of claims; some e

BY CHAD HEMENWAY

THE DIRECTORS AND Officers liabil- ity market is definitely unpredictable, probably mispriced and very likely an under-reserved mess, sources say—and new federal provisions have many experts expecting a surge of filings.

While the number of securities class-action settlements and settlement amounts were down in 2011 vs. 2010, according to data compiled by Cornerstone Research, that fact alone does not paint a clear

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picture of the litigation landscape that D&O policyholders and carriers are facing.

Because while severity is down— securities class-actions can generate huge settlements—the frequency of smaller cases is up, leeching policy limits.

“It has become a death by 1,000 cuts,”
says Key Coleman, managing director
at advisory service Grant
Adds Christopher
Cavallaro, a managing partner
of brokerage ARC Excess &
Surplus: “Yes, about 45 percent
of the money spent by D&O
carriers goes toward [securities
class-action lawsuits]. But these
class actions used to be the only issue on
which the market was judged. Now there
are tons of [cases] coming in, chipping away.
The numbers have become egregious.”
For example, experts say there has been
a rapid increase in the filing of smaller
suits against directors and officers for
breach of fiduciary duty during merger-
and-acquisition deals. In addition, suits
seeking disgorgement are becoming more
common, says Cavallaro.

Other lawsuits are filed following a bankruptcy, for fraud or misrepresentation— where directors and officers are blamed for the demise of a company. These suits

We haven’t yet seen the full fallout from Dodd-Frank. Without a doubt, the D&O world is changing.”

Ann Longmore, Executive Vice President at Willis North America’s FINEX Practice

can come from regulators, bond holders, shareholders and employees.

“One event can spawn a lot of litigation,” says Trevor Howard, senior vice president of U.S. management liability for Liberty International Underwriters (LIU).

“The claims out there these days are just much more diverse,” observes Cavallaro.

FDIC, DODD-FRANK SPARK SPIKE IN SUITS; JUST A WARM-UP?

Also adding to the headaches of those needing or offering D&O coverage: It’s difficult to miss the press releases announcing suits being brought by the Federal Deposit Insurance Corp. (FDIC) in an attempt to recover billions of dollars in losses—and many believe the

Whatever the trends [in claims], the one trend up consistently is defense costs. It’s harder to get [what had been] routine settlements rubber-stamped. Fees are up.”

Mark Curley, Global Head of D&O Claims, Chartis

FDIC is just warming up.

“It looks like the FDIC chose 2011 to pull the plug out,” Grant Thornton’s Coleman observes.

The FDIC has authorized lawsuits in connection with 54 failed institutions against 469 individuals for D&O liability, with damage claims of at least $7.9 billion as of March 20. That includes 27 filed D&O lawsuits naming 222 former directors and officers—which means the FDIC has even more cases on the way.

What we have seen from the FDIC is the “tip of the iceberg,” Howard warns.

But the risks to directors and officers, and their insurers, don’t end there. One insurance executive says he “can only imagine” the increase in litigation that will be caused by a whistleblower provision in the Dodd-Frank act, which provides incentives for those who give information to the U.S. Securities and Exchange Commission on possible violations by companies of federal securities laws.

That could increase the number of policy-covered company investigations, says Coleman, as well as policy-response disputes—for example, to what extent does a policy cover multiple investigations per year?