Directors & Officers Liability Claim Trends

Transcription

1 Directors & Officers Liability Claim Trends Prepared by the Lockton Financial Services Claims Practice October 2017 Lockton Companies LOCKTON MEETS WITH SEVERAL CARRIERS TO DISCUSS PRIVATE COMPANY D&O CLAIM TRENDS Lockton had the opportunity to sit down with several insurers and informally discuss private company D&O claim trends and what has been driving losses. Increased Bankruptcy and Financial Distress Claims Drive Severity Bankrupt and financially distressed insureds pose the greatest exposure for insurers, and the frequency for these types of claims has increased over the past several years. The severity is multiplied because these types of claims trigger Side A policies that do not require individual insureds to pay a retention. Broader Forms Lead to Increased Coverage of Non-Securities Claims The broader policy forms available to private companies have increased insurers exposure to non-securities claims like antitrust, competitor lawsuits, and consumer class actions. Breach of contract actions against the company that also name insured persons are more common and trigger defense costs coverage. One insurer noted that in the last year, its private D&O book suffered more than 40 claims with losses greater than $3 million. Traditional Securities Claims Are Also More Frequent Traditional shareholder disputes and breach of fiduciary duty actions, particularly those brought by minority shareholders, are on the rise. Increased M&A activity has led to more transaction-based suits, including allegations of aiding and abetting, when a private company purchases a public one. NINTH CIRCUIT EXCLUDES D&O COVERAGE FOR TCPA CLAIMS We have seen an explosion of Telephone Consumer Protection Act (TCPA) claims over the last ten years, going from 14 litigants in 2007 to nearly 5,000 in Severity has matched frequency with more than a dozen TCPA settlements exceeding $15 million. Coverage for TCPA claims is challenging, and insurers have resisted paying losses under a variety of policies, including D&O. L O C K T O N C O M P A N I E S

2 The Ninth Circuit, in Los Angeles Lakers v. Federal Ins. Co., recently affirmed that an insurer properly relied on an invasion of privacy exclusion to deny coverage for a TCPA claim under a private company D&O policy, though the panel was divided and contradictory in its reasoning. Public D&O policies already exclude this type of risk, and most insurers intend to exclude TCPA claims under all D&O policies. SECURITIES LAWSUIT FILINGS REMAIN AT RECORD HIGHS The first half of 2017 saw unprecedented frequency in litigation activity. Public companies have never had a greater likelihood of receiving a securities claim. Federal filings in 2017 have already surpassed 2016 s record totals. hh According to Cornerstone Research, 272 securities class actions were filed in 2016 compared to 201 the year before. The number of class actions filed in 2017 surpassed the 2016 total in early August. If filings continue at the current pace, we could see more than 450 public D&O class action claims filed in About 10 percent of public companies will face a D&O claim in 2017, a record. hh In 2016, 5.6 percent of listed companies were sued in federal court for a securities violation or a merger objection. That is the greatest percentage in 20 years and the fifth straight year this measure has risen. As of mid- August 2017, that record had already been broken. Nearly 10 percent of public companies are expected to have a D&O claim by year end, about triple the average percentage from 1997 through Nonfinancial cases continue to drive volume. hh Nonfinancial cases, those not based on an issuer s financial misstatement, historically accounted for less than half the total volume of securities class actions. But operational and event-based securities class actions are on the rise. In 2016, nonfinancial cases made up 75 percent of filed cases and 82 percent of the cases filed in the first half of

3 More cases yield more dismissals and cheaper settlements. h h Emerging law firms are driving the increase in securities suits, often focusing on small to midsized public companies. Fortunately, cases filed by such firms are dismissed more often (60 percent) than cases filed by traditional securities powerhouses (45 percent). Likewise, cases filed by emerging law firms settle more inexpensively than their traditional counterparts. An emerging law firm s median settlement in a case that survives a motion to dismiss and reaches discovery is $3.1 million. The median settlement in cases filed by more experienced securities firms is nearly $14 million. 5 SEC S ENFORCEMENT ACTIVITY SLOWS IN THE FIRST HALF OF FY2017 In 2016, the SEC brought 868 enforcement actions, more than ever before. That large total may have been driven by actions filed in anticipation of the new administration coming to power. The first half of FY2017 saw a decrease compared to the same period for actions versus 372 actions but the numbers for the first half of FY2017 were still greater than the comparable periods in FY2012 through FY2015. SEC enforcement activity usually increases in the second half of the fiscal year and may provide greater insight into the SEC s enforcement focus for the future. NEW SEC CHAIR JAY CLAYTON S OPENING REMARKS GIVE FEW HINTS Jay Clayton s first remarks as SEC Chair in July gave few specifics but hinted at a change in focus for the SEC. While praising outgoing Chair White, he emphasized protecting the Main Street investor and Mr. and Ms. 401(k) by focusing on scammers and fraudsters. He also intends to increase the attractiveness and liquidity of public markets. Chair Clayton emphasized the importance of cyber-related disclosures but stated that the SEC did not want to punish companies with responsible cyber practices. 6 3

4 SEC COMMISSIONER INVITES IPO COMPANIES TO CONSIDER ARBITRATION BYLAWS Traditionally, the SEC has been hostile to the notion of arbitration and has stated that shareholder arbitration requirements would violate the 34 Act. But SEC Commissioner Michael Piwowar invited new public companies to consider arbitration bylaw provisions and to discuss that concept with the SEC. While this seems like a defense-friendly strategy, institutional shareholders are sure to protest. 7 SUPREME COURT RULES 33 ACT STATUTES OF REPOSE CANNOT BE TOLLED A claim under the Securities Act of 1933 ( 33 Act) must be brought within one year of discovery of the violation (limitations period) or within three years after the security was first offered to the public (repose period). The Supreme Court long ago held that a pending class action tolls the limitations period, but in CalPERS v. ANZ Securities, the Court ruled that was not true for statutes of repose which cannot be tolled. Pundits predict this ruling may increase claim frequency with a wave of opt out filings to preserve rights under the 33 Act (and the Securities Exchange Act of 1934), but that has not been seen in the circuits that have already ruled this way. SUPREME COURT LIMITS PERIOD IN WHICH SEC CAN SEEK DISGORGEMENT In Kokesh v. SEC, the Supreme Court held that disgorgement constitutes a penalty and the SEC can only seek disgorgement of illicit profits earned during the limitations period, not for an open-ended amount of time. The ruling is good for defendants as it caps what the SEC may seek to only those profits obtained during a finite period. The decision potentially is problematic from an insurance standpoint though, as a penalty is often expressly excluded from coverage, where disgorgement arguably may be covered under certain limited circumstances. 4

5 SUPREME COURT TO DECIDE WHETHER SECURITIES LITIGATION IN CALIFORNIA STATE COURT IS PERMISSIBLE The United States Supreme Court agreed to hear the appeal in Cyan, Inc. v. Beaver County Employees Retirement Fund to decide if the Securities Litigation Uniform Standards Act (SLUSA) preempts the 33 Act s grant of concurrent jurisdiction in state courts. California state courts have seen a spike in IPO litigation under the 33 Act, but SLUSA was originally passed to keep securities matters in federal court, and Cyan argues that SLUSA should take precedent. State courts tend to be more plaintiff-friendly, so defendants would likely benefit if the Supreme Court rules in favor of Cyan. INTERNATIONAL D&O RISK INCREASES WITH RISE OF US-STYLE CLASS ACTIONS AND LITIGATION FUNDING Due to a lower risk of claims, insureds based outside the US historically have enjoyed premium discounts and broad coverage features that were unavailable in the United States. But that favored status is changing as European shareholders now have more recovery options available. Collective shareholder actions are possible in the UK via a Group Litigation Order that recently yielded a several-hundred-millionpound settlement against RBS and a new shareholder filing against Lloyd s TSB seeking a similar payout. Litigation funding is also on the rise, with firms raising large war chests to bring actions all over the world with approximately half of lawyers surveyed in the US, UK, and Australia expecting to use litigation funding in the next two years Id. 4 lmyqjaxmti3mdi3mjeymzi5wj/ 5 Id

6 AUTHORS Lockton Financial Services Claims Practice Atlanta Kansas City New York Mark Weintraub Claims Trends Editor Vice President, Bill Boeck Lockton Financial Services Claims Practice Leader Marie-France Gelot Insurance Claims Chicago Los Angeles San Francisco Don Glazier Claims Veronica Buckels Meredith Ponce Dallas Jennifer Gaither Ashley Jones Denver Raymond Dion Maryam Gilak Senior Analyst, August Swanson Paralegal Betsy Carpenter Claims Practice Leader St. Louis Noël Oleksa Claims Consultant, Financial Washington, DC Deanna Cook Claims Consultant Garry Whiter Assistant Vice President, Tim Monahan Vice President, Anna Camden Operations Assistant 2017 Lockton, Inc. All rights reserved. KC: