Every year just after Labor Day, I take a step back and survey the most important current trends and developments in the world of Directors’ and Officers’ liability and D&O insurance. This year’s survey is set out below. Once again, there are a host of things worth watching in the world of D&O.
What Will Happen With the Securities Cases on the U.S. Supreme Court’s Docket This Term?: For several months earlier this year, all eyes were on the U.S. Supreme Court as we awaited the outcome of the Halliburton case, which potentially could have been a game changer in the world of securities class action litigation. In the end, because the Supreme Court did not dump the “fraud on the market” theory, Halliburton will not have the disruptive effect that it might have. But even though the Halliburton case has been decided, there are still some good reasons to continue to keep an eye on the U.S. Supreme Court. The Court has two more securities cases on its docket for the upcoming term, and while neither has the disruptive potential that the Halliburton case had, they still could be significant.
First, as discussed here, in March 2014, the U.S. Supreme Court agreed to take up the Omnicare case, to determine whether or not it is sufficient to survive a dismissal motion for a plaintiff in a Section 11 case to allege that a statement of opinion was objectively false, or whether the plaintiff must also allege that the statement was subjectively false – that is, that the defendant did not believe the opinion at the time the statement was made.
The Supreme Court’s consideration of the Omnicare case will resolve a split in the circuits between those (such as the Second and Ninth Circuits) holding that in a Section 11 case allegations of knowledge of falsity are required; and those (such as the Sixth Circuit, in the Omnicare case) holding that allegations of knowledge of falsity are not required. The case is potentially important because the absence of allegations of knowledge of falsity is a frequent basis for dismissals of Section 11 suits in the Second and Ninth Circuits, where the vast preponderance of securities suits are filed. As it is, the current split would allow cases to go forward in the Sixth Circuit that would not survive in the Second and Ninth Circuits.
The defense bar has been sharply critical of the Sixth Circuit’s Omnicare opinion for overlooking the fact that as a matter of common sense a statement of opinion cannot be “false” unless the speaker truly did not hold the opinion. For a particularly good discussion of the defense perspective on the Sixth Circuit’s Omnicare decision and the issues it raises, please see Claire Loebs Davis’s August 12, 2013 post on the D&O Discourse blog (here)
Whatever the outcome, the Omnicare case will be important. The precedent in Second and Ninth Circuit’s holding that a Section 11 plaintiff must allege knowledge of falsity has been the basis of numerous dismissals in district courts in those circuits. If the Supreme Court were to hold that that Section 11 plaintiffs do not need to plead knowledge of falsity, many cases in those jurisdictions that are now dismissed would survive. However, it remains to be seen which view of Section 11 pleading will prevail.
Second, as discussed here, in Public Employees’ Retirement System of Mississippi, v. IndyMac MBS, the Supreme Court will consider whether the filing of a class action lawsuit tolls the statute of repose under the Securities Act (by operation of so-called “American Pipe” tolling) or whether the statute of repose operates as an absolute bar that cannot be tolled.
The statute of limitations for claims brought under the Securities Act of 1933, which is set out in Section 13 of the Act, provides that all claims under the Act must be brought within one year of the discovery of the violation or within the three years after the security involved was first offered to the public. Under the tolling doctrine established in the U.S. Supreme Court’s 1974 decision in American Pipe & Construction Co. v. Utah, the filing of a securities class action lawsuit tolls the running of the one-year statute of limitations. The question presented in the IndyMac MBS case is whether or not under American Pipe tolling the filing of a class action lawsuit tolls the three-year statute of repose.
Even though this case raises technical issues involving seemingly arcane legal doctrines, the case has potentially significant practical implications. If the filing of a class action lawsuit does not toll the statute of repose, current practices regarding class action opt-outs could be significantly affected. Institutional investors contend that they rely on class action claims filed by other claimants to prevent their claims from being time barred. They argue that if the statute of repose is an absolute bar, they would have to incur significantly higher litigation expenses as they would have to intervene earlier or otherwise act to protect their interests. They argue that they would have to become actively involved more frequently than they do now.
As discussed here, amicus briefs filed in the case argue that if the statute of repose is held to be an absolute bar not subject to tolling, class members in a large number of securities class actions would have to make wasteful “protective filings” in order to maintain their right to proceed independently and avoid being time-barred if class certification was subsequently denied. These filings would drain judicial resources and impose costs on putative class members. Defense advocates contend that the statute of repose was intended to provide closure and finality to Securities Act claims as well as to spare the courts and litigants from the need to litigate stale claims.
One final issue that these cases raise is the underlying question of why the U.S. Supreme Court has proven to be so keen to take up securities cases. It used to be that years would pass between the U.S. Supreme Court’s consideration of a securities case. In more recent years, the Supreme Court has proven to be much more interested in securities cases, which has meant that these days potentially significant securities cases are on the Court’s docket every term. It will be interesting to see whether the Court continues this trend in the upcoming term and agrees to take on additional cases for this term and the term following.
Will Litigation Reform Bylaws Continue to Succeed in the Courts?: For years, defense advocates have sought to try to curb abusive ligation through reform legislation and other means, yet corporate and securities litigation has continued to vex companies and their executives. However, an interesting new initiative has recently emerged – the attempt to achieve litigation reform through amendments to corporate bylaws. So far these litigation reform bylaws have fared well in the courts, although it remains to be seen what the ultimate effect of these reform bylaws will be.
The first reform bylaw proposed and the one that seems to have gained the most widespread acceptance is the forum selection bylaw. As discussed here, in June 2013, the Delaware Chancery Court upheld the validity of a bylaw adopted by Chevron’s board that designated Delaware as the exclusive forum for adjudication of various shareholder disputes. An exclusive forum bylaw can discourage forum shopping by plaintiffs and the practice of litigating similar or identical claims in multiple jurisdictions. The bylaws remove the need to hire multiple counsel and to make filings in different jurisdictions. These provisions reduce the risk of inconsistent outcomes. And they allow companies to designate a court with particular expertise in corporate matters – for example, the Delaware Court of Chancery. The use of exclusive forum provisions has now become mainstream. An increasingly large number of companies are adopting forum selection by laws and courts outside of the selected forum are showing a consistent willingness to enforce the provisions.
The next type of litigation reform bylaw that some companies have started to take up is the fee-shifting bylaw. This type of bylaw provides that an unsuccessful shareholder claimant in intra-corporate litigation would have to pay his or her adversaries’ cost of litigation. The Delaware Supreme Court stirred up quite a bit of controversy earlier this year in the ATP Tours, Inc. v. Deutscher Tennis Bund case when it upheld the facial validity of a fee-shifting by law. The controversy seemed headed for a swift resolution when the Delaware General Assembly quickly moved to act on a measure that would have limited the Supreme Court’s ruling to non-stock corporations (meaning that it wouldn’t apply to Delaware stock corporations). However, as discussed here, the legislature tabled the measure and now it will not be acted upon until at least January 2015.
While the continued validity of fee-shifting bylaws for Delaware stock corporations would seem to be in significant doubt, at least some companies are going ahead and incorporating these kinds of provisions in their bylaws, as discussed here. Interested parties and observers are busy debating whether or not under Delaware law stock corporations should (or should not) be allowed to adopt fee-shifting bylaws. For example, an August 27, 2014 Wall Street Journal op-ed piece (here) argued that companies should be allowed to adopt “loser pays” bylaws as a way to try to control costly shareholder litigation. It will be interesting to see how all of this ultimately plays out when the Delaware legislature takes up the tabled legislative measure in early 2015.
The most interesting and arguably most controversial proposal is the adoption of bylaws requiring shareholder disputes and claims to be resolved through binding arbitration. As discussed here, several courts have now upheld the validity of these types of bylaws, which may encourage other companies to consider adopting bylaws requiring shareholder disputes to be arbitrated. If mandatory arbitration bylaws barring class actions were enforceable, the likely outcome would be a decline in class actions, since the alleged existence of a class is a principal driver of attorneys’ fees.
However, as discussed here, there are a number of potential barriers to the widespread adoption of mandatory arbitration bylaws, including the policy of the Securities and Exchange Commission staff against allowing companies with arbitration provisions in their organizing documents to go public. Mandatory arbitration bylaws are also likely to attract significant negative stockholder sentiment, at least initially, particularly if they include a class action waiver.
Although these various proposed bylaws address different concerns, all of them represent a kind of litigation reform through bylaw revisions. There is obviously more of this story to be told before we can be certain what the ultimate impact of these provisions will be. It is interesting note the extent to which, as least so far, the validity of the reform bylaws has been upheld by the courts. These provisions potentially could have a significant impact on future corporate litigation, depending of course on the outcome of the pending measure in the Delaware legislature and the development of future court cases.
Is Cybersecurity the Next Critical D&O Liability Issue?: The news at the end of August that J.P. Morgan and four other major U.S. banks had been hacked by overseas operatives was merely the latest incident highlighting how critical cybersecurity issues have become for all companies and their boards. These risks present significant privacy and network security concerns for just about every enterprise. Along with the reputational risks and operational integrity issues, cybersecurity also increasingly represents a potential liability exposure for corporate directors and officers, as highlighted by two sets of lawsuits filed this year.
First, as discussed here, in January 2014, shareholders filed two derivative lawsuits in the United States District Court for the District of Minnesota against certain officers and directors of Target Corp. The two complaints alleged that the defendants were aware of how important the security of private customer information is to customers and to the company, as well the risks to the company that that a data breach could present. The complaints allege that the company “failed to take reasonable steps to maintain its customers’ personal and financial information,” and specifically with respect to the possibility of a data breach that the defendants failed “to implement any internal controls at Target designed to detect and prevent such a data breach.”
Second, as discussed here, a shareholder for Wyndham Worldwide Corporation initiated a derivative lawsuit against certain directors and officers of the company, as well as against the company itself as nominal defendant, related to the three data breaches the company the company and its operating units sustained during the period April 2008 to January 2010. As noted here, the company is already the target of a Federal Trade Commission enforcement action in connection with the breaches. The plaintiff alleges that “in violation of their express promise to do so, and contrary to reasonable expectations,” the company and its subsidiaries “failed to take reasonable steps to maintain their customers’ personal and financial information in a secure manner.”
These two sets of lawsuits highlight the fact that the risks and exposures companies face in connection with cybersecurity issues include potential liability exposures for companies’ corporate boards. As discussed here, SEC Commissioner Luis Aguilar underscored these potential liability exposures in a June 2014 speech which he stressed that “ensuring the adequacy of a company’s cybersecurity measures needs to be a part of a board of director’s risk oversight responsibilities.” He added the warning that “boards that choose to ignore, or minimize the importance of cybersecurity oversight responsibility, do so at their own peril.”
It remains to be seen how the plaintiffs in these actions fare. These cases may or may not prove to be successful for the plaintiffs. However, I think it is highly likely that we will continue to see more lawsuits of this type filed, particularly in connection with higher profile data breaches.
As these types of cases become more common, it will be interesting to see how the D&O insurance marketplace responds. At a minimum, it can be anticipated that carriers increasingly will include cybersecurity and cyber breach issues in the D&O insurance underwriting. Some carriers may even take more active steps to try to limit their exposures to cyber-related D&O exposures. At least one leading carrier has already started including privacy and network security exclusions on its management liability insurance policies issued to health care service companies. Other carriers may start to try to take defensive measures of this type.
At this point it seems that cyber breach-related issues are going to represent an increasingly important liability exposure for corporate directors and officers – and for their insurers.
Will Regulators Outside the U.S. Become Increasingly Active, and What Will the Impact Be?: One of the most distinctive aspects of the current global regulatory environment has been the increasing willingness of U.S. regulators to try to project U.S. enforcement authority outside the U.S. The cross-border assertion of U.S. regulatory authority has taken place across a broad range of regulatory and compliance issues, including, for example, antitrust, trade sanction, and taxation enforcement as discussed here.
In a series of developments that ultimately may prove be even more significant, regulators outside the Unites States have also recently become much more active. These regulators’ enforcement activities have significant implications within their respective home jurisdictions, but they may have important implications for all companies doing business in those countries, regardless of where the companies are domiciled. The developments may also have important D&O insurance implications as well.
One of the highest profile regulatory enforcement developments outside the U.S. in recent months was the July 2014 action by India’s securities regulator, the Securities and Exchange Board of India (SEBI), entered an order (here) against the founder and former executives of Satyam Computer Services to disgorge over $306 million in allegedly ill-gotten gains from their role in the scheme to falsify the company’s financial statements, as well as at least $201 million in interest. As commentator quoted in the Wall Street Journal article noted, “this order by itself is driving a message that SEBI is going to be aggressive in dealing with fraud in the Indian Capital Markets.” Indeed, in an August 27 2014 interview in the Financial Times (here), the head of SEBI is quoted as saying that India is “set to launch a fresh crackdown on securities fraud with a long-awaited revamp of insider trading rules and powers to boost investigation and enforcement.”
These developments in India are merely one part of the significant efforts by regulators around the world to ramp up their enforcement efforts. Authorities in a number of countries, including, among others, China and Brazil, have ramped up their anticorruption enforcement. China and the EU, among others, have also recently stepped up their antitrust enforcement.
This increase in regulatory activity can have significant implications for companies outside the regulators’ jurisdiction. To cite but one recent example, on July 24, 2014, the UK Serious Fraud Office announced that it had brought corruption charges against the UK subsidiary of Alstom in connection with transportation projects in India, Poland and Tunisia. The UK investigation commenced because of information provided to the SFO by the Office of the Attorney General of Switzerland. The company has already been fined for related activities by the Swiss government. Other recent examples of extensive cross border cooperation include the recent investigation of the alleged manipulation of the Libor benchmark interest rates.
It has been well-established that regulatory investigations in the U.S. can lead to follow on civil litigation, as discussed here. The interesting recent development has been rise of follow-on civil litigation in the U.S. following regulatory activity outside the country. For example, as discussed here, in January 2014, Nu Skin Enterprises was hit with a securities class action lawsuit following news of an alleged investigation of the company’s allegedly fraudulent sales practices in China. Similarly, in June 2014, China Mobile Games and Entertainment Group was hit with a securities class action lawsuit following the news of an anti-bribery investigation in China involving company officials, as discussed here.
These developments raise important issues about the liability exposures of the potentially affected companies as well as for their directors and officers. The liability exposures include not only the potential regulatory and enforcement risk but also the possibility of follow-on civil actions, brought by shareholders or others. The “others” that might bring claims include supervisory board members in those jurisdictions with the dual-board structure.
These issues in turn have important D&O insurance implications. The issues also present a particularly difficult challenge for D&O insurance underwriters involved in underwriting companies outside the U.S. as they must attempt to understand and anticipate these kinds of actions from regulators and how they may affect the companies under consideration.
Will Increased IPO Activity Mean Increased IPO-Related Litigation?: The number of companies completing initial public offerings is currently at the highest level in years. According to a recent study from Cornerstone Research (here), with the 112 IPOs in the first half of 2014, IPO activity is on pace to increase for the third consecutive year. IPO activity just in the first six months of 2014 equaled 71 percent of total IPO activity in 2013 and exceeded the full years 2009, 2010, 2011 and 2012. The favorable IPO environment has encouraged even more companies to move toward an IPO.
While the listing activity seems to bode well for the general economy as well as for the financial markets, the increased number of IPOs has also led to an uptick in IPO-related securities litigation. According to my unofficial and unaudited year-to-date securities class action litigation filing tally, through the end of August 2014, there were a total of 106 new securities class action lawsuits filed this year. (The year to date filing activity annualizes to a total of roughly 160 securities suit, more or less in line with the last couple of years).
Of the 106 securities suits so far this year, seven (or roughly five percent) were filed based on alleged misrepresentations in the company’s IPO documents. However, all but one of these suits involved companies that completed their IPOs in 2013. Lawsuits that may ultimately be filed against 2014 IPO companies are yet to emerge; given the increased level of IPO activity in 2014, it seems probable that when lawsuits against 2014 IPO companies develop, there will be more IPO-related lawsuits filed, simply because there were more IPOs.
Along with the likely increase in the number of IPO-related securities suits, an increase in the number of lawsuits involving pre-IPO companies – asserting, for example, failure to launch claims – also seems likely. When a company is on a trajectory toward an IPO, there is a natural tendency to focus on the liability exposures the company will face after it goes public. But the process leading up to the IPO often involves circumstances that can create their own set of risks and exposures. As a company readies itself to go public, it often restructures its operations, its accounting, its debt, or other corporate features. The company also makes pre-offering disclosures, for example, in road show statements. The process creates expectations that can create their own set of problems. All of these changes, disclosures and circumstances potentially can lead to claims, particularly if the offering does not go forward.
Often pre-IPO company management is reluctant to take the time to address D&O insurance issues at the appropriate time before the company is deep into the IPO process. But claims can and often do arise involving companies’ pre-IPO activities.
What Impact Will the JOBS Act Crowdfunding Provisions Have?:Among the factors contributing to the recent growth in the number of IPOs are the so-called IPO on-ramp procedures, which were enacted in 2012 as part of the Jumpstart our Business Startups (JOBS) Act, which among other things allowed “Emerging Growth Companies” to file the registration statements confidentially. While some provisions of the JOBS Act, such as the IPO on-ramp provisions, are having an impact, other provisions are yet to go into effect. Most significantly, the SEC is yet to release the final regulations pertaining to crowdfunding.
The JOBS Act contained statutory provisions providing exemptions under the securities laws allowing certain kinds of start up ventures to raise equity financing from non-accredited investors using Internet fundraising platforms. The statutory provisions specified that the SEC was to provide implementing regulations. The SEC finally published proposed crowdfunding rules in October 2013 (as discussed here); however, the agency has yet to publish the final rules, and so the JOBS Act crowdfunding initiative is still yet to take effect, a development for which the SEC is now facing considerable criticism from members of Congress
Eventually, the SEC will release the final crowdfunding rules and companies will be able to raise equity financing from non-accredited investors through online platforms. It is hard to know how significant a development this will turn out to be, since the JOBS Act imposes restrictive limitations on the amounts companies can raise through crowdfunding offerings. For example, companies may sell no more than $1 million of securities within any 12-month period and the amount sold to any one investor may not exceed specified per investor annual income and net worth limitations
Another issue that will be important to watch is the extent to which disappointed crowdfunding investors try to invoke the liability provisions Congress included in crowdfunding provisions. The Act expressly imposes liability on issuers and their directors and officers for material misrepresentations and omissions made to investors in connection with a crowdfunding offering. The companies likeliest to engage in crowdfunding will be smaller private companies, but just the same the crowdfunding liability provisions create the possibility for these companies of liabilities under the federal securities laws.
This combination of small private companies and potential federal securities law exposure represents a conundrum for the D&O insurance marketplace, which views the world as neatly divided between private and public companies. These crowdfunding provisions may blur the clarity of this division, a development that the D&O insurers are struggling to address. Responses from the carriers have ranged from, on the one hand, at least one carrier mandating the inclusion on all private companies of an endorsement precluding coverage for liability arising from crowdfunding activities, while on other hand, another carrier recently introduced an endorsement expressly extending coverage under its private company policy to crowdfunding.
The D&O insurance marketplace’s adjustments to crowdfunding have so far all taken place in anticipation of the advent of equity financing through crowdfunding. Once the implementing regulations finally take effect, there undoubtedly will be further responses and adjustments in the marketplace, particularly as if become clear how significant the threat of crowdfunding liability will turn out to be. The private company D&O insurers will be watching these developments very closely.
How Will the Mass of Pending Failed Bank Litigation Play Out?: Even though the peak of the financial crisis is now several years past, banks have continued to fail. During 2014, a total of 14 banks have failed, although there were no bank closures at all during August. The number of bank failures is down significantly from recent years and it seems probable that the number of closures eventually will slow to no more than a trickle.
As reflected here, the FDIC has filed a total of 97 lawsuit against directors and officers of failed banks as part of the current bank failure wave. In addition, through July 24, 2014, the FDIC has authorized suits in connection with 145 failed institutions. But while the extent to which the number of authorized lawsuits exceeds the number of lawsuits filed would seem to imply a backlog of as yet unfilled litigation, the fact is that the pace of the agency’s lawsuit filing activity has slowed. The agency has not filed any new lawsuits since May 2014. It may be that as the bank failures wind down, the level of lawsuit activity will wind down as well. One likely contributing factor is the lapse of the three-year statute of limitations with respect to the bank closures during the second half of 2009 and the first six months of 2010, when the number of bank failures peaked.
According to the FDIC, of the 97 lawsuits it has filed, 26 have fully settled and one resulted in a favorable jury verdict. These numbers imply a significant number of pending and as yet unresolved lawsuits that will continue to work their way through the system. There are a number of important implications from this continuing litigation.
First, it seems likely that we will continue to see significant judicial decision-making on issues relating to the liabilities of directors and officers. The failed bank litigation has already led to a number of significant decisions on issues relating to D&O liability. For example, in July 2014, in connection with one of the failed bank cases pending in Georgia, the Georgia Supreme Court issued a landmark decision discussing the protections available under Georgia law to corporate directors and officers under the Business Judgment Rule, as discussed here. As the pending cases continue to work their way through the system we may see further judicial decisions affecting the liability exposures of directors and officers.
Second, in connection with insurance coverage litigation that has arisen in conjunction with the FDIC failed bank litigation, we will see further judicial decisions interpreting key D&O insurance policy provisions. For example, as discussed here, there have been a number of interesting decisions addressing the question of whether or not the insured vs. insured exclusion found in most D&O insurance policies precludes coverage for claims brought by the FDIC in its capacity as receiver of a failed bank. So far, the cases have reached differing conclusion on this question. But in any event, it seems likely there will be further judicial decisions interpreting D&O insurance policy language as the failed bank insurance coverage litigation unfolds.
Third, the pending litigation will continue to weigh on the D&O insurance carriers that are active in providing insurance to commercial banks. Even though the peak in the financial crisis is now well in the past, the ongoing litigation continues to produce adverse development in these carriers’ prior underwriting year results and to undermine their current calendar year results, a combination that is particularly painful in the current low interest rate environment (when there is less investment income with which to try and offset adverse claims experience).
The banking-related claims losses are continuing to accumulate at the same time that the overall universe of potential banking-related buyers continues to shrink, due to the combination of mergers and the dearth of new bank formations. As a result, the carriers are struggling to spread adverse loss experience across a shrinking portfolio. The accumulating losses from prior underwriting years and the shrinking customer pool means that it is harder for these carriers to show an underwriting profit on a current calendar year basis. The heightened loss experience and shrinking customer base suggests that these carriers will be facing pressure on their calendar year results – and therefore on premiums — for some time to come.
Will Environmental Liability and Climate Change Emerge as Important D&O Liability Issues?: During the financial crisis, many issues and concerns that previously had loomed large moved further down the agenda. Even though the recovery from the crisis is still uneven, some of the issues that fell by the wayside are moving back up the list of priorities. Environmental liability issues are among these concerns. Among other things, this has meant an uptick in D&O litigation arising from environmental issues.
In recent months, there have been a number of securities class action lawsuits filed based on alleged misrepresentations of the defendant company’s environmental compliance. On August 7, 2014, the securities suit filed against Exide Technologies and certain of its directors and officers based on the defendants’ allegedly misleading statements about the company’s compliance with environmental regulations became the latest environmental disclosure securities suits to overcome the initial pleading hurdles. A copy of Central District of California Judge Stephen V. Wilson’s August 7, 2014 order denying the defendants’ motion to dismiss can be found here.
The survival of the environmental disclosure securities suit against Exide comes closely after the Second Circuit’s recent ruling in the JinkoSolar securities suit, discussed here, in which the appellate court reversed the lower court dismissal of the suit and concluded that the plaintiffs’ allegations concerning the alleged deficiencies of the defendant company’s environmental compliance disclosures were sufficient. While these are just two cases, it does seem as if the plaintiffs are getting some traction in securities suits based on environmental compliance disclosures. These cases underscore the fact that reporting companies’ environmental compliance disclosures are facing increasing scrutiny, making the quality of the environmental disclosures increasingly important.
As the derivative lawsuit filled earlier this year against the board of Duke Energy highlights, environmental issues apparently are becoming an area of increasing focus for plaintiffs’ lawyers. As cases like those filed against Exide and JinkoSolar prove to be viable, further cases based on environmental compliance and environmental disclosures may follow.
In addition to these issues arising from traditional environmental liability concerns, there may be reason to be concerned that D&O liability issues could arise from alarms over global climate change. As discussed here, in a series of letters sent to board members of various major energy companies and to a number of participants in the directors and officers liability insurance industry, three environmental groups contend that climate change denial by energy industry representatives presents a risk of personal liability to the individual energy company board members. The letters also contend that “the threat of future civil or criminal litigation could have major implications for D&O liability insurance coverage.” The letters were sent in late May by three environmental organizations – Greenpeace International, the World Wildlife Fund International and the Center for International Environmental Law – to board members at 32 energy companies and to 44 participants in the D&O insurance industry.
Even though the environmental groups’ letter writing campaign clearly was a publicity stunt, there could be some truth to the idea that there will be efforts to hold corporate board members personally liable for the costs associated with climate change. For that matter, it may even be these same environmental groups that bring these claims. Other claims could come from shareholders, regulators, property owners, municipalities and even insurers. Of course any claim of this type would face significant causation issues among many other hurdles. But just the same there may be some truth to the environmental groups’ suggestion that climate change-related claims against corporate boards could be coming.
While one might question the groups’ tactics and methods, it probably is in fact a worthwhile exercise for the D&O industry to think about whether or not climate change related claims might be coming and to think about how the industry should be preparing to respond. The list of items to be considered includes questions about how these possibilities should affect pricing, underwriting and risk selection. The issues also should include terms and conditions – such as, for example, whether the provisions of the typical pollution and environmental liability exclusion found in many policies needs to be revised.
What Does All of This Mean for the D&O Insurance Marketplace?: Because of the developments discussed above and numerous other issues and concerns, D&O insurers must operate in a dynamic and rapidly changing environment. In addition, as noted above, the insurers also must operate in a low interest rete environment, in which there will be little interest income to offset claims losses. Insurers face pressure to produce underwriting profit in an environment that makes profitable underwriting challenging.
Based on these concerns as well as ongoing claims results, primary public company D&O insurers and private company D&O insurers continue to push for rate increases, with at least some success. Even in an environment where new competitors continue to appear, the marketplace is continuing to support price increases, although to a lesser extent than in recent years and to a lesser extent for excess insurance. For some public company D&O buyers, increases in the premium for the primary D&O insurance continue to be offset at least in part by premium savings on their excess insurance.
The marketplace remains challenging for financially distressed risks or companies with adverse claims histories. In addition, certain risk classes – for example, developmental stage biotech companies, some commercial banks, and public non-traded REITS — continue to be viewed as higher risk and to pay higher premiums for their D&O insurance.
Despite all of the challenging circumstances, the D&O insurance marketplace continues to attract new players. The continued competition means that all of the trends toward a hardening market are blunted. For D&O insurance buyers outside the higher risk categories and with healthier financials, the marketplace remains generally favorable. By and large, policyholders continue to be able to obtain broad coverage; so far, the carriers have not significantly pulled back on terms and conditions.
Of all the things to watch in the months ahead in the world of D&O, one of the most interesting will be to see how the D&O insurers respond to the continuing challenges in a rapidly changing environment.
Upcoming PLUS Event in London: On September 29, 2014, I will be in London to participate in the Professional Liability Underwriting Society (PLUS) regional symposium. The luncheon event, which is entitled “Dangers of Long Arm Enforcement in a World WIthout Borders” will take place at Gibson Hall. I will be making a presentation at the event on the topic of “The Dangerous Cross-Border Regulatory Environment.” The keynote speaker at the event will be the author and consultant David Berminham, who is best known as one of the NatWest Three, who will be presenting his own personal perspective on cross-border enforcement based on his extradition to the U.S. on charges related to the Enron scandal. Following the keynote address, Berminham and I will discuss the evolving challenges in an increasingly global regulatory environment.
Background details about the event, including registration information, can be found here. I have participated on a panel with David Bermingham in the past and I can assure everyone that this will be a lively and interesting event. I hope all of my UK readers and friends will plan on attending.