Every fall since I first started writing this blog, I have assembled a list of the current hot topics in the world of directors’ and officers’ liability. This year’s list is set out below. As should be obvious, there is a lot going on right now in the world of D&O, with further changes just over the horizon. The year ahead could be very interesting and eventful. Here is what to watch now in the world of D&O:
How Significant Will the Libor Scandal-Related Litigation Be?: The Libor scandal itself first began to unfold more than four years ago, following a series of articles in the Wall Street Journal. But with the dramatic announcements in late June of the imposition of fines and penalties of over $450 million against Barclays PLC, the scandal has shifted into a higher gear and has become one of the leading stories in financial papers around the world. At this point, it is apparent that the Libor scandal is going to be one of the hot topics for months and perhaps years to come. An overview of the scandal and of the key developments in recent months can be found here.
As is often the case when scandal breaks, the investigative and regulatory developments have been followed by litigation. As discussed here, some of the litigation began to emerge over a year ago, but with the Barclays regulatory settlements, there has been a raft of more recent litigation. Many of the lawsuits have raised antitrust allegations, but at least one of the recent lawsuits – one brought by Barclays shareholders – involves claims under the federal securities laws.
It does seem probable that by the time this scandal plays itself out, there will be many more regulatory settlements, some of which might make the Barclays settlements look like pocket change. A related question is whether the banks’ civil litigation exposures are going to be similarly enormous. It is clearly far too early to know for sure. But there are a number of factors that should be kept in mind on the question of what the Libor-scandal litigation might mean for the D&O insurance industry.
First, many of the undoubtedly huge costs that are looming likely will not represent insured amounts. The regulatory fines and penalties will not be insured. The company investigative costs also are likely not covered. In addition, most of the antitrust litigation filed to date has named only corporate defendants. Under the typical D&O insurance policy, the companies themselves are only insured for securities claims. So the antitrust litigation, for example, would likely not be covered under the typical D&O insurance policy.
In addition, many of these large banks do not carry traditional D&O insurance or may only have restricted insurance. In some instances, the banks’ insurance may include a substantial coinsurance percentage or a massive self-insured retention. Other banks may only carry so-called Side A only insurance, which covers individual directors and officers only and is only available when the corporate entity is unable to indemnify the individuals due to insolvency or legal prohibition. Given that none of the potentially involved banks have failed, it seems unlikely that this Side A only coverage would be triggered.
In the end, while the Libor scandal related follow-on litigation could be massive, the Libor scandal may not prove to be a significant event for the D&O insurance industry. Of course, developments could prove this analysis wrong. The plaintiff lawyers may come up with creative ways to expand the universe of defendants, or claimants may meet with unexpected success in asserting claims outside the U.S. If these kinds of things were to happen, then the Libor scandal could prove to be a more serious event for the D&O insurance industry. But as things stand, it does not appear that this scandal is, by itself, going to change the market.
What Will the Impact of the JOBS Act Be?: On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (commonly referred to as the JOBS Act). As discussed at greater length here, the JOBS Act contains a number of IPO “on ramp” procedures designed to ease the process and burdens of the “going public process” for Emerging Growth Companies (EGCs). For example, EGCs can elect to submit their IPO registration statement for SEC review on a confidential, nonpublic basis, although the registration statement must be publicly filed at least 21 days before the IPO roadshow. Among the other features of Act that has attracted the most attention are the legislation’s provisions for “crowdfunding.” Under these provisions, a company is permitted to raise up to $1 million during any 12-month period through an SEC-registered crowdfunding portal
It was hoped that the legislation would encourage EGCs and facilitate job creation. However, as discussed in Jason Zweig’s August 4, 2012 Wall Street Journal article entitled “When Laws Twist Markets” (here), at least so far the one thing the Act seems to have produced is “unintended consequences.”
By way of illustration, Zweig cites as an example of one company trying to take advantage of the JOBS Act’s streamlined IPO procedures and reduced reporting requirements the 132 year-old British football club, Manchester United. Zweig also refers to “blind pools” and “blank check” investment funds that are angling to take advantage of the JOBS Act’s provisions. Neither type of company is likely to contribute to job creation in the United States. Zweig also reports that at least seven Chinese companies are converting to JOBS Act reporting provisions, in order to be able to reduce the disclosures they are required to file; as Zweig points out, this is “no trivial matter since several other Chinese-based companies have recently been accused by U.S. regulators of filing misleading financial statements.”
The Act’s reduced reporting requirements are also producing some unintended consequences. A number of commentators have noted that while these JOBS Act provisions may serve the laudable goal of easing the IPO process, these provision also introduce risks for investors. Nor are these remarks just coming from sideline commentators. Many of the most specific warnings are coming from the companies themselves.
In her May 15, 2012 CFO.com article entitled “A New Risk Factor: The JOBS Act” (here), Sarah Johnson reports that for many of the companies taking advantage of the JOBS Act IPO on-ramp provisions, the fact that the companies are relying in the JOBS Act “is itself a risk factor.” Her article notes that recently a number of companies “have warned investors in their prospectuses filed with the Securities and Exchange Commission that the JOBS Act’s breaks on SEC rules could actually be a turnoff.” By way of example, she quotes Cimarron Software’s recently filed S-1, in which the company states that “we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.”
A common assumption about the new crowdfunding procedure is that it will be most beneficial to start-up companies. But at least according to a May 9, 2012 CFO.com article (here), due to the procedural burdens and costs associated with the JOBS Act’s crowdfunding provisions, crowdfunding is unlikely to be an attractive alternative for start-up companies.
According to the article, the crowdfunding provisions in the JOBS Act may be “too complex and onerous” and “not very cost-effective” for an early-stage company. Among other things, entrepreneurs launching a new venture “may lack the financial acumen and robust business plans they’ll need to comply with the JOBS Act” and they also “may not have the cash to hire the accountants and lawyers they will need to navigate the law.” In addition, as discussed here, many commentators are concerned that the potential for fraud on the crowd may outweigh the promise of new financing for legitimate startups. Among other reasons for these concerns is that with crowdfunding, “the risk of fraud increases because the pool of investors includes those who have no personal relationship with the business owner and who may be geographically remote from and thus unable to oversee the business itself.
From the perspective of the directors and officers of companies seeking to raise capital through crowdfunding, it is important to note that the crowdfunding activity entails its own liability exposures. The JOBS Act expressly incorporates provisions imposing liability on crowdfunding issuers for misrepresentations and omissions in the offerings, on terms similar to the existing provisions of Section 12 of the Securities Act of 1933. Under these provisions, a person who purchases securities issued under the crowdfunding exemption may bring an action based on any material misrepresentation or omission against the issuer, directors and executives for a full refund or damages.
It is also worth noteworthy that these crowdfunding provisions may blur the clarity of the division between private and public companies. The crowdfunding provisions seem to expressly contemplate that a private company would be able to engage in crowdfunding financing activities without assuming public company reporting obligations. Yet at the same time, that same private company will be required to make certain disclosure filings with the SEC in connection with the offering and could potentially incur liability under Section 302(c) of the JOBS Act
Private companies interested in taking advantage of the crowdfunding provisions once they become effective will want to review their D&O insurance policies’ public offering exclusions to determine whether or not these exclusions would preclude coverage for a crowdfunding liability action under Section 302(c) of the Jobs Act. The wordings of this exclusion vary widely among different policies, and some wordings could be sufficiently broad to preclude coverage.
Going forward, however, carriers may seek to adjust the wordings of these exclusions or other policy provisions in light of the crowdfunding liability exposure. Some carriers may try to take the position that crowdfunding liability is a kind of risk that they did not intend to cover in a private company D&O insurance policy. Indeed, some private company D&O Insurers have already introduced “Crowdfunding” endorsements designed to narrow or eliminate the carriers’ potential exposure to liability incurred in connection with crowdfunding activities.
As was the case with the Sarbanes-Oxley Act and the Dodd-Frank Act, the D&O insurance industry may face a long period where it must assess the impact of changes introduced by this broad, new legislation. It may be some time before all of the Act’s implications and ramifications can be identified and understood. It will be important for companies and their advisors to monitor these developments as they unfold
What Will Happen to the Pace of Banking Closures and FDIC Failed Bank Litigation Filings?: The pace of bank failures has slowed considerably during 2012. Year to date through August 31, 2012, there have been a total of 40 bank closures, compared to 74 during the period January 1, 2011 through August 31, 2011. Since January 1, 2008, 454 banks have failed, but during the month of August 2012 only a single bank failed. In addition, the number of banks the FDIC has ranked as problem institutions has also declined for five consecutive quarters.
But though both the number of bank failures and the number of problem institutions are declining, the FDIC’s most recent Quarterly Banking Profile shows that the FDIC still ranks over ten percent of the nation’s depository institutions as problem institutions. In other words, though the pace of bank failures may have slowed, there may be much further to go before the current banking crisis is completely behind us.
As was the case during the S&L crisis two decades ago, the current wave of bank failures has also led to an influx of lawsuits brought by the FDIC, as receiver for the failed banks, against the banks’ former directors and officers. Through August 31, 2012, the FDIC had filed a total of 32 failed bank lawsuits, including 14 so far during 2012. The pace of the FDIC’s lawsuits filings has slowed considerably as the year has progressed. During the first four months of the year, the FDIC filed eleven lawsuits. However, between April 20, 2012 and August 31, 2012, the FDIC filed only three additional lawsuits. Indeed, since mid-July, the FDIC has not filed any additional failed bank lawsuits.
This apparent lull in lawsuit filings is surprising, for a couple of reasons. First, during the equivalent period three years prior to the apparent filing lull, there were a host of bank closures, over 50 in all. In light of the three year statute of limitations, one would have expected the last few months to have been a period of heightened filing activity.
The filing lull is even more surprising given that the FDIC itself has indicated that it has approved many more lawsuits than have actually been filed so far. As of August 14, 2012, the last date on which the FDIC updated its website, the agency indicated that his has now authorized suits involving 73 failed institutions; against 617 individuals for D&O liability. So far the agency has filed 32 suits involving 31 failed institutions, involving 268 individuals.
In view of the substantial gap between the number of authorized lawsuits and the number filed so far, it seems likely that the pace of failed bank lawsuit filings will pick back up at some point. But given the current lull, it does start to seem that perhaps there will not be as much overall failed bank litigation as had originally seemed likely. Even just a short time ago, some commentators had been predicting there might be a total of 86 FDIC lawsuits against the directors and officers of failed banks as part of the current bank failure wave. The final number may prove to be lower than projected.
Now That the First Dodd-Frank Whistleblower Bounty Has Been Paid, Will We See More Enforcement Actions and Follow-On Civil Litigation Based on Whistleblower Report?: When the whistleblower bounty provisions in the Dodd-Frank Act were enacted, there were concerns that the provisions – allowing whistleblowers an award between 10% and 30% of the money collected when information provided by the whistleblower leads to an SEC enforcement action in which more than $1 million in sanctions is ordered – would encourage a flood of reports from would be whistleblowers who hope to cash in on the potentially rich rewards.
We may now be closer to finding out whether or not these concerns were valid. As reflected in the SEC’s August 21, 2012 press release (here), the agency has now made its first whistleblower award for the relatively modest amount of $50,000. According to the press release, “the award represents 30 percent of the amount collected in an SEC enforcement action against the perpetrators of the scheme, the maximum percentage payout allowed by the whistleblower law.”
The press release also explains that the whistleblower’s assistance led to a court ordering more than $1 million in sanctions, of which approximately $150,000 has been collected thus far. The court is considering whether to issue a final judgment against other defendants in the matter. Any increase in the sanctions ordered and collected will increase payments to the whistleblower.
The recent award may be the first under the bounty program, but it is clear that there will be many more to come. The SEC’s August 21 press release quotes SEC Chairman Mary Schapiro as saying that “The whistleblower program is already becoming a success. We’re seeing high-quality tips that are saving our investigators substantial time and resources.” The press release also quotes the head of the SEC’s whistleblower office as saying that since the program was established in August 2011, about eight tips a day are flowing into the SEC, adding that “the fact that we made the first payment after just one year of operation shows that we are open for business and ready to pay people who bring us good, timely information.”
It seems obvious that whistleblowers, motivated by the bounty program, are coming forward to report securities law violations. It also seems probable that some (perhaps many) of the situations reported would not otherwise come to the attention of the SEC, and that with these reports the pace of enforcement activity will increase.
These developments have companies worried. As discussed in an August 29, 2012 CFO.com article (here), some companies are worried that because of the lure of the bounty award, company employees will bypass internal reporting mechanisms and go straight to the SEC. And not only is it a concern that more companies could find themselves having to deal with SEC enforcement activity, it is entirely possible that the enforcement activity will in turn lead to follow-on litigation in the form of shareholder derivative suits, and even in some cases increased securities class action litigation.
It is far too early to tell whether and to what extent any of these concerns actually will come to pass, especially since there has still only been just one whistleblower bounty award. Nevertheless, there definitely so seem to be reasons for companies to be concerned.
Will Congress Take Steps to Increase Corporate Officials’ Liability Exposures and Narrow Their Protection?: As if it were not enough that through the Dodd-Frank whistleblower provisions that Congress has enacted provisions to increase the likelihood of SEC enforcement action, a bill now pending in Congress could increase the size of the penalties the SEC can impose.
As discussed in greater detail here, on July 23, 2012, Democratic Rhode Island Senator Jack Reed and Republican Senator Charles Grassley introduced a bill titled The Stronger Enforcement of Civil Penalties Act of 2012 to increase the SEC’s civil monetary penalties authority and to directly link the size of those penalties to the scope of the harm and investor losses. The Senators’ joint July 23, 2012 press release about the Bill can be found here. The Bill has been referred to the Senate Committee on Banking, Housing, and Urban Affairs.
The Bill proposes to update the maximum money penalties the SEC can obtain from both individuals and from entities, and further provides that the penalties may be obtained both in enforcement actions filed in federal court and in the agency’s own administrative actions (currently the SEC must file a civil enforcement action in order to seek penalties).
The increased penalties proposed by the new Bill are scaled to the seriousness of the offense. For the most serious offenses (specified as the third tier violations involving fraud, deceit or manipulation) the per violation penalty for individuals may not exceed the greater of $1 million; three times the gross pecuniary gain; or the losses incurred by victims that result from the violation. The maximum per violation penalty the SEC can seek from entities is limited to the greater of $10 million; three times the gross pecuniary gain; or the losses incurred by victims.
For less serious violations, the maximum amount the SEC may seek is correspondingly lower. For individuals, the per violation penalty may not exceed the greater of $100,000 or the gross pecuniary gain as a result of the violation. The equivalent per violation limit for entities is the greater of $500,000 or the amount of the pecuniary gain. The maximum per violation penalty amount for violations not involving fraud or deceit is the greater of $10,000 for individuals or the amount of the pecuniary gain, and for entities, the greater of $100,000 of the amount of the pecuniary gain
The bill was submitted at the request of SEC Chairman Shapiro, enjoys bipartisan support, and represents policies that President Obama has advocated, so it seems likely to pass into law. The practical implication seems to be not just that the SEC will seek higher penalties, but will seek penalties more often, given the proposed new authority to seek penalties in administrative actions. With greater firepower at its disposal, the SEC may become even more active, and perhaps even more aggressive.
In a separate development, on May 30, 2012, Representative Barney Frank introduced a bill entitled the “Executive Compensation Clawback Full Enforcement Act” (here) that by its own terms is designed to “prohibit individuals from insurance against possible losses from having to repay illegally-received compensation or from having to repay civil penalties.” The proposed Act’s appears primarily addressed to the compensation clawback sections in the FDIC’s “orderly liquidation authority” in the Dodd-Frank Act. However, the proposed Act’s separate prohibition of insurance for “civil money penalties” appears to address the long-standing question of insurance for civil money penalties imposed on bank officials by the FDIC. Rep. Frank’s bill is discussed in greater detail here. The bill has been referred to the House Subcommittee on Financial Institutions and Consumer Credit.
From news coverage of Rep. Frank’s introduction of the bill, the proposed Act appears to be expressly addressed to certain compensation clawback insurance products that have been introduced into the marketplace. Frank himself is quoted as saying “"the creation of insurance policies to insulate financial executives from claw-backs is one more effort by some in the industry to perpetuate a lack of accountability.”
The proposed Act’s provisions also seem expressly designed to address the question of insurance for the FDIC’s imposition of “civil money penalties” against senior officials at depositary institutions. The question of insurability of civil money penalties is a long-standing one. As discussed in a prior guest post on this site, the FDIC has taken the position on an individual institution level basis that insurance protecting individual bank directors and officer from civil money penalties is prohibited. But while there was some discussion of and concern about these issues, the question of insurability of civil money penalties remained an uncertain issue (at least for the banks themselves, if not for the FDIC). However, if Rep. Frank’s bill becomes law, or at least of its provisions prohibiting insurance of civil money penalties becomes law, the question would obviously be resolved.
What Will Be the Impact of the Amgen Case, Now Pending Before the U.S. Supreme Court?: Over the course of the past several years, the U.S. Supreme Court has shown an unusual willingness to take up securities cases. During the upcoming term, the Court will once again be considering an important securities case. As discussed here, on June 11, 2012, the Court granted the petition of Amgen for a writ of certiorari in a securities lawsuit pending against the company. As a result, next term the Court will be addressing the question of whether securities plaintiffs must establish in their class certification petition that the alleged misrepresentation on which they rely was material.
In the Amgen case, the plaintiff had sued Amgen and certain of its directors and officers seeing damages under the federal securities laws based on alleged misrepresentations about the safety of certain of the company’s products. The plaintiff moved to certify a class of Amgen shareholders. The defendants opposed the motion, arguing that the plaintiff was not entitled to a class-wide presumption of reliance based on the fraud-on-the-market theory, because the plaintiff could not show that the alleged misrepresentations were material. To the contrary, the defendants argued that as a result of analyst reports and public documents, the market was aware of the information that the plaintiff alleged had been concealed. The district court rejected the defendants’ arguments and certified a plaintiff class, rulings that the Ninth Circuit affirmed.
Amgen then filed a petition to the Supreme Court for a writ of certiorari. In its petition, a copy of which can be found here, Amgen argued that there is an “irreconcilable conflict” in the federal judicial circuits on the question of whether or not a plaintiff must establish materiality at the class certification stage. According to the cert petition, the Second and Fifth Circuits have held that a plaintiff must prove materiality for class certification and that defendants may present evidence to rebut the applicability of the fraud-on-the-market theory at the class certification. The Seventh and Ninth Circuits, by contrast, hold that district courts are barred from considering materiality at the class certification stage.
The Third Circuit, according to the petition, has adopted an “intermediate approach” which holds that a plaintiff does not need to demonstrate materiality as part of an initial showing before class certification, but that defendants may rebut the applicability of the fraud-on-the market theory by disproving the materiality of the alleged misrepresentation.
In its cert petition, Amgen stressed the “in terrorem power of certification” in the securities litigation context, which often compels defendants to enter into massive settlements. The presence or absence of this kind of pressure will, Amgen argued, depend on the circuit in which the case was filed. In the Seventh and Ninth Circuits, the company argued, defendants “will frequently be forced by practical realities, to settle cases for enormous sums regardless of whether they have a meritorious materiality defense,” while in the Second and Fifth Circuits, the plaintiffs would have to establish materiality as a precondition to class certification, and in the Third Circuit, the defendants would have the opportunity to rebut any materiality showing.
As the Morrison & Foerster firm said in its June 11, 2012 memorandum about the Supreme Court's cert grant in the Amgen case,
A clear answer from the Supreme Court to these questions could have a significant impact on securities litigation. A decision that endorses the Ninth Circuit's approach could made securities litigation more costly for defendants, particularly in circuits where plaintiffs are presently required to prove materiality at class certification. Conversely, a decision rejecting the Ninth Circuit's approach could provide defendants an early opportunity to challenge the viability of class action claims.
In addition, there is the possibility here that the Supreme Court -- rather than narrowly interpreting the existing standard for the applicability of the fraud-on-the-market presumption -- does something more radical instead, like entirely redefining whether, when and how the fraud-on-the market presumption might apply. Indeed, this case presents the Court with its first clear chance to revisit the doctrine since it was first articulated nearly a quarter of a century ago.
In other words, the Roberts court has once again agreed to hear a case that at least potentially could have an enormous impact on the class action securities litigation exposures of public companies and their directors and officers. The case will be argued and decided during the Supreme Court term commencing in October.
How (and When) Will the Long-Running Credit Crisis Litigation Wave Finally Play Out?: The first of the subprime and credit crisis related securities suits was filed in February 2007. Over the course of the following years over 240 credit crisis securities class action lawsuits ultimately were filed, and during the past five years the cases have slowly been making there way through the system.
Many cases have been dismissed, and of the cases that have survived dismissal motions many have been settled. The latest case to settle was the high profile Citigroup case, which the parties announced on August 29, 2012 (here) had been settled for $590 million. A number of other cases have settled in recent months, including the Bear Stearns case, which settled earlier this summer for $275 million. My running tally of subprime and credit crisis-related securities suit resolutions, including settlements, can be accessed here.
The securities litigation related to the subprime meltdown and credit crisis has not produced any settlements on the scale of the mammoth, multi-billion dollar settlements in the era of corporate scandals a decade ago, but in the aggregate and on average, the credit crisis litigation has produced very significant settlement numbers. With these latest settlements, the aggregate amount of all of the subprime and credit crisis-related lawsuit settlements to date is about $5.5 billion. The average settlement is about $103.8 million, but if the three settlements over $500 million are taken out of the equation, the average drops to about $73.22 million.
The pace of settlements in these cases appears to have slowed somewhat during 2012 compared to a year ago. During 2011, 22 of the subprime meltdown and credit crisis securities suits settled, including sixteen between January 1, 2011 and August 31, 2011. However, during the same eight month period during 2012, only eleven cases settled.
Though the pace of settlements may have slowed, that does not necessary we are reaching the conclusion of this aggregate litigation event. Many cases continue to work their way through the system, and some of the highest profile cases are yet to be resolved, including the BofA/Merrill Lynch merger case, the AIG case, and the Citigroup bondholders’ case. As these cases and others work themselves out, they will continue to weigh on the results of the affected D&O insurers. It will be some time yet before we can calculate the final tally on the subprime and credit crisis litigation wave.
Will the Many Other Scandals Roiling the Financial Industry Lead to Additional Claims?: The Libor-scandal is far from the only financial scandal in which the financial industry had become mired recently. Unfortunately, a host of other scandals involving the industry have also emerged or expanded over the summer. These recent scandals may also lead to claims, and some cases already has.
First, there’s the money laundering scandal. In July, the U.S. Senate released a report alleged that over the last decade HSBC failed to implement anti-money-laundering protections and evaded Treasury sanctions against Iran, Myanmar, and others. The Senate report says HSBC facilitated the flow of billions of dollars between Mexico and the U.S. despite warnings drug money was involved, and provided cash to banks with ties to terrorist groups. The report also faulted the government’s Office of the Comptroller of the Currency for taking virtually no action against the bank despite being aware of problems for years. In late July, HSBC said that HSBC said that it had set aside $700 million to cover the potential fines, settlements and other expenses related to the money-laundering inquiry.
Second, in early August, the New York Department of Financial Services raised allegations that Standard Chartered had disregarded Treasury sanctions by allowing transactions with Iranian banks worth as much as $250 billion to pass through its New York office and that the bank had deliberately obscured the country of origin. On August 14, 2012, the New York regulator announced that Standard Chartered had agreed to a civil penalty of $340 million to resolve the charges. Investigations into the bank by other authorities including the Department of Justice and the Office of Foreign Assets Control continue. The Standard Chartered settlement followed the June 2012 announcement of the Office of Foreign Assets control that ING had agreed to pay a settlement of $619 million to settle allegations that the company had violated U.S. sanctions.
Third, a host of regulators are investigating the losses J.P Morgan suffered as a result of derivatives trades in the company’s London office that went seriously awry. At last report, the company’s losses from the trades (which were known in the financial markets as the “London Whale” trade) be as much as $5.8 billion.
Beyond these headline grabbing scandals, there have also been a host of smaller scale scandals involving the financial services industry, including Wells Fargo’s $173 million settlement with the Department of Justice of allegations that the company engaged in discriminatory residential home mortgage lending practices; Capitol One’s $210 million settlement with the Consumer Financial Protection Bureau of allegations that the credit-card issuer pressured customers into buying consumer-credit-protection products such as identity-theft-monitoring services; and Capitol One’s $12 million settlement with the Department of Justice that the company had violated certain statutory protections for veterans, among other things, through wrongful foreclosures.
Indeed, this past summer so many scandals involving the financial services industry that you needed a scorecard just to keep track of them all.
Litigation has already followed in the wake of at least some of these scandals. As discussed here, following the initial disclosure of J.P. Morgan’s losses from the London Whale trades, shareholders filed a securities class action lawsuit against the company and certain of its directors and officers, alleging that the company’s statements regarding its trading practices and internal controls were misleading. In addition, following Standard Chartered’s settlement with the New York regulator, families of the victim’s of the 1983 bombing of the Marine barracks in Beirut sued the bank seeking compensation for its concealment of its Iran-linked transactions.
Investigations in connection with some of these various scandals are continuing. It remains to be seen whether as further details and developments emerge there will be further follow-on civil litigation. The sheer number of scandals seems to suggest the likelihood that there will be further lawsuits. There certainly does seem to be limit to the capacity of the financial industry to produce scandals.
What are the Implications of All of This for the D&O Insurance Marketplace?: After several years in which D&O insurance purchasers have enjoyed declining premiums and expanding coverage, the marketplace seems to have reached an inflection point. At a minimum, almost all of the private company management liability carriers are attempting to increase premium or otherwise add coverage restrictions to their renewals. Based on current trends, most private company insurance buyers can expect to see increases of from 5% to 10 % (and in some cases, more) at their next renewal, with financially troubled companies and companies with adverse claims histories potentially seeing even larger increases.
The public company D&O insurance marketplace has also shifted recently. Economic turmoil and increased governmental regulation and enforcement activity continue to pose a challenging environment for companies and their directors and officers. At the same time, merger objection suits and other negative claims trends have led some carriers to complain of premium inadequacy. Public company D&O carriers in some case are attempting to increase in premium and retention levels. Companies that are likeliest to see upward pressure on their insurance premiums are those that have an adverse claims history or are experiencing financial challenges. Although the carriers for many kinds of companies may be pushing to increase premiums, companies in the following industries are likelier to experience premium pressure: financial services, including commercial banking; extractive natural resources; life sciences; and technology.
Some carriers are also attempting to add coverage restrictions, at least in some cases. Among other restrictive provisions that some carriers are seeking in at least some cases are: separate retentions for mergers and acquisitions activity; separate retentions or other restrictive provisions relating to “crowdfunding”; and in private company management liability policies that have an employment practices coverage section providing sublimited defense cost coverage for wage and hour claims, a reduction in the sublimit.
Though the market environment clearly has shifted in recent months, we are not in a true “hard market.” The insurance marketplace continues to be characterized by significant levels of insurance capacity. Given the current high capacity levels, it is possible that competitive forces could undermine many of the market changes noted above. The current, more disciplined underwriting climate could either represent a transition to a sustained period of higher insurance prices and more restrictive terms, or it could merely be a temporary phase before softer market conditions resume. For the present, however, insurance buyers should be prepared for the possibility that they will see premium increases at their next renewal.