In 2015, as was the case for several years prior, companies in the life sciences sector experienced a disproportionately greater number of securities class action lawsuits than companies in other industries. As I detailed in my analysis of 2015 securities class action lawsuit filings (here), 39 of the 191 securities class action lawsuits filed in 2015 involved companies in the life sciences sector, representing about one in five of all securities suit filings during the year. No other sector experienced anywhere near this number of securities class action lawsuit flings. For example, the sector with the second-most number of filings, software companies, had eleven filings during 2015, representing about 6% of securities suit filings during the year.
There are a number of reasons why there are more securities suit filings involving life sciences companies, as discussed below. The frequency and severity of lawsuits against companies in the life sciences sector have important D&O Insurance implications as well, as also discussed below.
As discussed in the Dechert law firm’s March 2015 survey of securities class action litigation involving life sciences companies (about which refer here), life sciences companies, by contrast to companies in other sectors, are more likely to get hit with industry-specific securities class action lawsuit allegations, as opposed to more general finance and accounting-related allegations in securities suits filed against companies in other sectors. The kinds of allegations that life sciences companies face include allegations relating to regulatory approvals and the timing and progress of clinical trials, as well as allegations relating to product safety, efficacy, and manufacturing. According to the Dechert report, approximately 56% of the 2014 securities suits against life sciences companies involved these types of industry specific allegations, while claims of inaccurate financial reports/accounting improprieties were asserted in 44% of the 2014 life sciences securities suits. Some of the 2014 suits involved both types of allegations.
As Jennifer Sharkey details in a February 16, 2016 post on the WGA Insure Blog entitled “Directors & Officers Liability for Life Sciences Marketplace” (here), a number of D&O insurers concerned about the concentration of their portfolios of companies in the life sciences sector several years ago began reducing their exposure to the sector and increasing rates. In 2016, as a result of the ongoing heightened frequency in the life sciences sector, D&O insurance underwriters continue to be concerned about life sciences companies. However, as Sharkey notes, life sciences companies engaged in D&O insurance transactions are likely to experience a “bifurcated marketplace” between their primary D&O insurance and their excess D&O insurance.
With respect to the primary D&O insurance layers, the specific experience of any specific life sciences company will depend on the specific company’s characteristics, as the primary premium levels for life sciences companies “are increasingly driven by each company’s distinct risk profile and market capitalization.” In particular, companies with “complex securities litigation, ongoing investigations, or that are approaching commercialization or an IPO (particularly one-product biopharmaceutical companies conducting later stage clinical trials)” may “experience firmer primary pricing.” In addition, some primary D&O insurers may be seeking to increase retentions for securities claims and for M&A-related claims.
The market for excess D&O insurance for life sciences companies, by contrast to the market for primary D&O insurance, is different, due to abundance of excess capacity. As a result, rates for higher level excess and for excess Side A/DIC insurance declined in 2015. However, Sharkey suggests that excess rates may already be at a minimum, and that the excess rates “will inevitably bottom out in 2016 as excess insurers are closely assessing the risk assumed for the premiums collected.”
As life sciences companies consider their options, it will be important, as Sharkey notes, for life sciences companies to choose carefully in selecting their insurance partners. In particular, companies should carefully consider the carriers’ “experience in underwriting and understanding life sciences companies, claims paying ability, financial strength, [and] longevity and commitment to the sector.
University of Oklahoma Settles D&O Lawsuit Involving Allegedly Looted Painting: Many readers will recall the prior post (here) in which I described the lawsuit that had been filed against the Board of Regents of the University of Oklahoma and the University’s President, in which the descendant of a European art collector alleged that the University’s art museum housed a painting that had been looted by Nazis from her father’s art collection during the Nazi occupation of France in World War II. The painting, entitled Bergère rentrant des moutons (Shepherdess Bringing in Sheep, pictured left), often referred to as La Bergère, was donated to the museum as part of a large 2000 bequest by University benefactors.
According to a February 23, 2016 Reuters article (here), the University and the claimant have now reached a settlement of the dispute. Under the settlement, title to the painting will be transferred to the family of the claimant, Leone Meyer. The settlement calls for the painting to be displayed at the university’s Fred Jones Jr. Museum of Art and a yet-to-be-named museum in France on a rotating, five-year basis. Under the settlement, the university will recognize that the painting was stolen.
As I noted in my earlier post about the lawsuit, the case is interesting in a number of respects, among other reasons as an example of the way that art provenance disputes can lead to D&O claims. Unfortunately, provenance disputes are not uncommon, and when they arise, they can involve claims against the senior management and board of the entity or organization holding the disputed art work, in the same way that the claims were asserted here against the Board of Regents and the University President. Art provenance claims in which individuals members of a museum’s board of directors are named as defendants can raise a number of complicated D&O insurance issues, as I noted and discussed in my prior post.