The following post previously appeared as an article in a recent issue of the Munich Re publication, Schadenspiegel. The article also appeared as a post on the Munich Re website, Topics Online. The article is reprinted here with the permission of Munich Re.
The liability arena for corporate directors and officers has long been characterized by a dynamic claims environment. In the past, the highest-profile developments in this arena have taken place primarily in the United States, due to long-standing patterns of litigiousness there. However, in the last few years changes in applicable laws and in the regulatory environment, as well as a series of high-profile scandals, have increased the significance of D&O insurance across the world.
The most significant D&O liability severity risk for US-listed publicly traded companies is the possibility of a class action lawsuit under the US securities laws. According to NERA Economic Consulting, the average and median US securities class action lawsuit settlement in 2015 was US$ 52m and US$ 7.3m respectively, with defense costs representing millions more. For that reason, US securities class action lawsuit filing trends represent an important indicator of aggregate D&O claims frequency and severity and are very closely watched in the domestic US D&O insurance industry. Several of the 2015 securities litigation filing trends may be of particular concern to insurers.
Specifically, the number of securities class action lawsuit filings during 2015 (189), while consistent with the annual average during the period 1996–2014 of 188, represented the highest annual number of securities class action lawsuit filings since the financial crisis year of 2008. These filing figures take on an even greater significance when considered relative to the number of US-listed companies, which has been steadily declining since the early 1990s (although there has been a slight upward increase in recent years owing to increased IPO activity). Overall, there are nearly 40% fewer US-listed companies than there were in 1996.
The upshot of all of this is that the likelihood of any US-listed company getting hit with a securities class action lawsuit – which during 2015 stood at approximately 4% – is at its highest level in years. By way of comparison, the annual average securities litigation frequency for US-listed companies during the period 1996–2014 was 2.9%. As Cornerstone Research said in its annual report about US securities class action activity, “In 2015, companies listed on US exchanges were more likely to be the target of a class action than at any time during the period 1996–2014.”
Reasons for the Increase in Securities Class Actions
There are a number of factors driving this increased US securities class action litigation frequency. For example, heightened levels of IPO activity on the US securities exchanges have led to an increase in IPO-related litigation. In addition, a greater frequency of securities litigation involving life sciences companies also contributed to the overall increase. Another factor in 2015 were the elevated levels of US securities litigation activity involving companies domiciled or based outside the US with listings on US exchanges.
For many years, about 16% of all US-listed companies were domiciled or based outside the US. Historically, these non-US companies have experienced US securities litigation less frequently than US-based companies. During the period 1996 to 2014, securities litigation involving non-US companies represented only about 11% of all US securities litigation filings.
However, in recent years, and despite the longer-term historical trends, the non-US companies have been more likely than US-domiciled companies to be involved in US securities litigation.
Thus, in 2015, though non-US companies represented slightly less than 17% of all US-listed companies, securities lawsuits involving non-US companies represented nearly 19% of all US-securities class action lawsuits. Indeed, even though the annual likelihood of any US-listed company being hit with a securities lawsuit (4%) was at its highest level for years in 2015, the likelihood of a non-US company being hit with a securities lawsuit was at an even higher level (4.1%).
This greater likelihood of US securities litigation activity for non-US companies might be interpreted to suggest that all non-US companies represent a greater securities class action litigation risk than would comparable US-based companies, and that D&O insurance for non-US companies should be rated and priced accordingly. However, the data need to be scrut inised a little more closely before the correct underwriting conclusions may be drawn.
The most important additional element to be considered is the fact that of the 35 securities class action lawsuit filings involving non-US companies during 2015, 15 of them involved US-listed Chinese companies. The elevated securities litigation frequency for non-US companies during 2015, and indeed for the past several years, has largely been a factor of heightened levels of securities activity involving Chinese companies. Once the impact of the Chinese-related litigation activity is factored out, the US securities litigation activity involving non-US companies looks much more consistent with the proportion of non-US companies listed on the US exchanges.
Significant Developments Outside the US
While securities class actions continue to be more frequent and more costly in the US than elsewhere, there are indications that such lawsuits are gaining ground outside the US as well. As a result of changes in the applicable laws, a number of countries have seen increased levels of securities litigation activity. In addition, the increased levels of regulatory scrutiny both during and after the global financial crisis have bolstered these trends, as has the increased availability of litigation funding. The significance of these trends has been heightened by the emergence of a number of high-profile scandals that have motivated many investors and their representatives to seek collective redress for investment losses.
Securities class action activity is now a wellestablished part of the litigation environment in Canada and Australia. More recently, a combination of changes in the legal environment and revelation of alleged corporate misconduct has led to a number of litigation initiatives in a variety of dif ferent countries, including the UK, Brazil and Germany.
Dutch Collective Settlements
All of these developments will be interesting to watch, but of all the recent developments perhaps the most significant and most interesting is the recently announced settlement of the Fortis investor proceedings under the Dutch collective settlement procedures (WCAM). On 14 March 2016, Ageas, as Fortis is now known, announced that it had reached a €1.2bn settlement with a number of shareholder foundations in proceedings based on the events surrounding Fortis’s participation in the acquisition of ABN AMRO in 2007. The settlement is subject to approval by the Amsterdam Court of Appeals.
If approved, the Fortis settlement would represent by far the largest settlement ever under the Dutch collective settlement procedures. The settlement could also boost several other pending initiatives in which organisations representing other shareholder groups are seeking to use the Dutch procedures in connection with the current scandals. Of course, there would be a host of issues that would have to be sorted out before the Dutch procedures could be used to resolve any of these other procedures. But there is no doubt that with the Fortis settlement, the Dutch procedures arguably have emerged as a possible preferred way to secure resolution of initiatives for collective investor relief. Indeed, because a judgment of the Dutch courts in support of settlement would presumptively be enforceable throughout the EU, and because of the opt-out basis on which the Dutch settlement procedures are built, the Dutch procedures could prove to be of interest to the corporate defendants as well as to prospective claimants.
Whether or not the Dutch collective settlement procedures emerge as a preferred mechanism to resolve collective investor claims, there is no doubt that activity on behalf of investors will continue to emerge, to the point that the risk of collective investor litigation arguably is no longer exposure-concentrated in the US, Canada and Australia. The initiatives on behalf of investors in other jurisdictions, and in particular the emergence of the Dutch collective settlement procedures as a possible preferred mechanism for collective investor redress, arguably present the D&O insurance community with an altered risk underwriting atmosphere. Along those lines, it should not be overlooked that at least €290m of the €1.2bn Fortis settlement will be funded by Fortis’s D&O insurers.
Recent developments and claims filing trends mean that D&O insurance underwriters face a complex and challenging environment. Heightened claims activity, particularly with respect to collective investor redress actions, represents both a frequency and severity risk for D&O insurers. In the past, US securities class action litigation represented the most significant D&O exposure. However, developments in a number of jurisdictions suggest that this type of exposure is now more widespread.