What the Stats Don t Show: D&O Coverage Issues in the Real World Presentation by White and Williams LLP
Recent Trends in Securities Litigation / Regulatory Enforcement Actions and Impact on D&O Coverage The Big Four : Securities Class Actions Shareholder Derivative Actions M&A Litigation Regulatory Actions
Securities Class Actions Federal securities class action filing activity remains at depressed levels. 74 filings in the first six months of 2013 down 16% from the first half of 2012. Number of filings in the first six months of 2013 well below historical average of 95 per six-month period. If trend continues, there will be 148 filings in 2013, the second-lowest annual total since 1997. 100 90 80 70 60 50 40 30 20 10 0 Drop in Filings for 1st Half Period Source: Cornerstone Research, "Securities Class Action Filings, 2013 Mid-Year Assessment"
Securities Class Actions The Reality: Securities Class Actions are a by-product of the stock market and a reflection of the economy. An Inverse Relationship: Stock Market Securities Filings Stock Market Securities Filings
Shareholder Derivative Actions The Stats: Represent 17% of all securities litigation Shareholder derivative actions are also down, dipped in the second quarter of 2013 as compared to Q1 Raw statistics difficult to obtain and compile due to large number of cases pending in various state courts
Shareholder Derivative Actions The Reality: Derivative Actions are costly No PSLRA, multiple actions, multiple jurisdictions More plaintiffs law firms = more mouths to feed
Shareholder Derivative Actions Are recent mega derivative settlements (i.e., Newscorp) an aberration or the new norm? How do these developments affect Side-A insurers? Does existence of Side-A insurance increase the value of shareholder derivative actions?
M&A Litigation The Stats: In 2012, shareholders challenged 93% of M&A deals valued over $100 million and 96% of transactions valued over $500 million 80% of settlements involved no monetary relief The number of lawsuits dropped from 742 in 2011 to 602 in 2012 Attorney-fee awards have decreased since 2009 Source: Cornerstone Research, Shareholder Litigation Involving Mergers and Acquisitions, February 2013 Update
M&A Litigation The Reality: A strong correlation between market performance, economic health, and the number of M&A deals The more deals, the more suits Again, the plaintiffs will be there at the opportune time
Regulatory Actions The Stats: The number of total regulatory actions has declined in 2012, and again in 2013 Five straight years of decline in SEC financial fraud investigations Sources: Advisen, Quarterly D&O Claim Trends: Quarter 2 and Law 360, February 21, 2013
Regulatory Actions The Reality: Storm Clouds on the Horizon The SEC is bolstering its staff and formulating a more aggressive approach (for example, the requirement for admissions of liability) High-profile investigations (e.g., SAC Capital) may increase Admissions of liability may result in numerous tag-along civil actions and increased costs
Recent Trends The Big-Picture Takeaway Four major categories of actions Frequency of each type of action shifts over time and reacts to market realities The plaintiffs bar is here to stay only question is where they focus efforts By keeping a close eye on market realities, D&O insurers can be proactive and realistic in both underwriting and claims handling
Private Company D&O: Key Coverage Issues and Managing Exposure Duty to Defend Coverage Issues Frequently Arising in the Private Context
Duty to Defend Unlike public company context, private company D&O insurers typically have duty to defend What is the duty to defend?
Duty to Defend The duty to defend is broader than the duty to indemnify New York: [A] liability insurer has a duty to defend its insured in a pending lawsuit if the pleadings allege a covered occurrence, even though facts outside the four corners of those pleadings indicate that the claim may be meritless or not covered. Fitzpatrick v. America Honda Motor Co. Inc., 78 N.Y.2d 61, 63 (1991) California: Even where the underlying allegations are clearly outside the scope of coverage, the insurer may be compelled to provide a defense if there is any possibility, based upon the actual facts, that there will be a judgment based upon non-intentional conduct. Gray v. Zurich, 65 Cal. 2d 263, 276 (1966)
Duty to Defend Breaching the duty to defend is risky: [W]hen a liability insurer has breached its duty to defend its insured, the insurer may not later rely on Policy exclusions to avoid indemnification. K2 Investment Group, LLC, et al v. American Guarantee & Liability Insurance Company, 2013 NY Slip op. 4270 (N.Y., June 11, 2013)
Duty to Defend Generally, any possibility of coverage will trigger defense requirement A denial in a non-duty to defend context may therefore be a reservation of rights in the duty to defend context Stronger focus on trusted panel counsel, litigation budget and early resolution
Frequently Arising Coverage Issues Coverage issues in the private context tend to involve internal disputes Insured v. Insured Contract Disputes Insured Capacity
Frequently Arising Coverage Issues Insured v. Insured Excludes from coverage losses for claims brought by one insured against another insured Limits moral hazard insurers should not pay for business mistakes Definition of Insured does it include all current and former directors, officers and employees? What about when Insured defendants are sued by a group of insured and noninsured plaintiffs? Look to the policy s allocation provision. Claims brought by non-insured parties may be covered, while claims brought by insured parties may be excluded. See, Miller, et al. v. St. Paul Mercury Ins. Co., Case Nos. 10-3839, et al. (7 th Cir. June 29, 2012)
Frequently Arising Coverage Issues Contractual Liability Excludes from coverage claims based upon liability assumed under express or implied agreement, and claims alleging breach of contract Many claims in the private context arise out of contractual disputes Liability even in the absence of the agreement? carveback may apply Look to preamble language (based upon, arising out of, etc.) how broad? could exclude entire claim
Frequently Arising Coverage Issues Insured Capacity Limits coverage to those acts conducted by an insured person acting in his or her capacity as such Capacity ordinarily means role in which one performs an act Is Insured being sued in his capacity as a director, officer or employee of the Insured entity?
Frequently Arising Coverage Issues Insured Capacity What are the basis of the allegations against the Insured? What is the nature of the relief sought? Was the alleged conduct done in furtherance of the Insured s duties to the company? See, Federal Ins. Co. v. Sandusky, Case No. 4:11-cv-02375 (M.D.Pa. March 1, 2013)
Private Company D&O The Big Picture Takeaway With great power, comes great responsibility. Private companies lack the resources of large public companies and rely more heavily on insurers. More pressure on insurer to step in and provide defense, especially in light of duty to defend standard.
Private Company D&O The Big-Picture Takeaway Very high burden to prevail on a straight denial The nature of the coverage issues are unique D&O insurers must be aware of the unique nature of the coverage issues in the underwriting context Emphasis on strong, tailored language for insured v. insured and contractual liability exclusions, as well as definition of insured and allocation provision For claims handling, focus on reliable, result-oriented panel counsel, early reservation of rights, litigation budget and bottom line claim resolution