One of the most distinct securities class action lawsuit filing phenomena since the outbreak of COVID-19 in the U.S. in March 2020 has been the surge of pandemic-related securities suits,  particularly during the period 2020 through 2022. This securities suit filing trend even continued into 2023, although the incidence of COVID-related suits dwindled during the year. However, in an unexpected development, a plaintiff shareholder has now filed yet another COVID-related securities suit against BioNTech, the German biotechnology company that, along with its partner Pfizer, was lionized for helping to develop a COVID-19 vaccine. The company was hit with a securities suit after its share price declined following a sizeable inventory write-off. A copy of the January 12, 2024, complaint against the company can be found here.

Continue Reading A New COVID-Related Securities Suit for the New Year
Nelson Kefauver

In the following guest post, Nelson Kefauver, Head of Profin Underwriting at Intact Insurance, takes a look at how three frequent industry predictions from the recent past have turned out.  Nelson’s comments are specific to the private and non-profit D&O insurance space and not do not refer to the public company D&O insurance claims environment.  I would like to thank Nelson for allowing me to publish this guest post on my site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Nelson’s post.

It is difficult to make predictions, especially about the future. That well-known saying has been attributed to numerous people, including Mark Twain, Niels Bohr, and Yogi Berra.  When it comes to Private Company and Nonprofit Financial Lines space, how have we done with our predictions on claims trends over the past few years?

Let’s look at some of the more common predictions in our industry of the past few years. We will analyze how such predictions have panned out, checking against the claims data from our Management Liability segment at Intact Insurance Specialty Solutions.

Prediction 1

We will see a flurry of cyber claims spill over and create Directors and Officers (D&O) claims.

Insurance brokers, insurance underwriters, executives, and board members are rightly concerned with this possibility.  However, privately held companies and nonprofit organizations have not seen many cyber claims morph into D&O claims.

Was this first prediction accurate? We are off base so far.  We have only seen isolated cases of cyber claims turning into D&O claims.  There have certainly been a few claims, most notably in the publicly traded space.  However, our claim dataset shows little cyber activity spilling over into D&O claims for privately held companies and nonprofit organizations.

Prediction 2

We will see a wave of claims stemming from Covid.  These will include, among others, claims related to vaccine mandates, return to the office, hybrid employment, fraud from the Paycheck Protection Program (PPP), and financial distress.

In 2020, the fear of claims from Covid accelerated a firming market into a hard market.  Many insurers reduced limits and created lots of complex Covid questionnaires.  Some insurers took the opportunity to exit certain classes of business and a few exited financial lines products altogether.

Did prediction two come to pass? We were way off the mark.  Our claim dataset shows post-Covid, the claim frequency dropped rather than increased.  We certainly have had some claims related to vaccine mandates, but not a market-changing amount.  The frequency of employment-related claims overall went down.  This is probably because employees are in the office fewer days of the week, on average.  We find the lack of claims related to PPP fraud particularly surprising.  Either the government is slow on tracking down such fraud, or we are a much more honest society than we believed.  I am guessing the former.  What about financial distress claims? On a macro-level, Covid assistance money bolstered the financial condition of many companies and organizations and consumers had more to spend.  Corporate bankruptcies were at historic lows in 2021 and 2022.

Prediction 3

ESG claims are coming!  Beware ESG!

The prediction was that we would see an ever-increasing number of claims involving private companies and nonprofit organizations related to pollution, diversity, social justice, and corporate ethics.

Have we seen a significant amount of ESG claims against private companies and nonprofit organizations?  As with the prior two claim categories, this story is not finished, and we could certainly see an acceleration of such claims.  To date, our claim dataset does not show a material amount of ESG claims.  One tangential area of exception to this is in the Law Enforcement Legal Liability space.  Here, claim types that could be categorized as social justice related have seen frequency and severity on a sharp uptake.

It is healthy to compare what we thought might happen in the past to what has occurred.  There are plenty of claim trends to be concerned with, but predicting what those problematic claim trends is easier said than done.

As I have noted in prior posts, due to a political “backlash” against ESG, many companies have found it expedient to avoid talking about ESG altogether – a developing that has been referred to as “greenhushing.” Indeed, some academics have even suggested that it may be time to say “RIP” to ESG. But if the expression “ESG” is now verboten, how are we going to talk collectively about the various topics encompassed by the term “ESG”?

According to a January 10, 2024, front-page Wall Street Journal article entitled “The Latest Dirty Word in Corporate America: ESG” (here), as “ESG” has become the three letters that corporate officials dare not utter, they have found other ways to talk about “responsible business.” Meanwhile, corporate environmental and social responsibility efforts continue despite the apparent banishment of “ESG” as an expression. Moreover, as also discussed below, due to regulatory changes, the likelihood is that discussion of the concepts underlying what was referred to in past as “ESG” are only going to increase, regardless whether or not the term “ESG” is used.

Continue Reading Goodbye ESG, Hello “Responsible Business”

According to a new report, the number of excess fee and performance lawsuits filed in 2023 declined relative to the extraordinary filings levels in 2022, but excess fee lawsuit filings remained elevated. By contrast to prior years in which plaintiffs’ lawyers seemingly targeted benefit plans of all sizes, in 2023 the excess benefit plan lawsuits filed in 2023 primarily targeted companies with larger benefit plans. The number and aggregate total value of excess fee lawsuit settlements in 2023 was a record levels during the year. The January 8, 2024, report about the excess fee lawsuit filings, written by Daniel Aronowitz of Euclid Specialty, can be found here.

Continue Reading Excess Fee Lawsuit Filings Declined in 2023 Due to Backlog of Prior Cases

Because so many of you were out of the office or away from your desks last week, I am posting a reminder that, along with my colleagues Marissa Streckfuss and Chris Bertola, I will be hosting a free, one-hour seminar on The Top Ten D&O Stories of 2023 on Thursday, January 11, 2023 at 11:00 am EST. In the webinar, we will be discussing the top developments in the World of D&O during 2023, including The Banking Crisis of 2023, the role of macroeconomic and geopolitical factors in D&O liability, ESG, Cybersecurity, and AI. Registration for the seminar can be found here. I hope all of you can join in. My Top Ten blog post can be found here.

The directors’ and officers’ liability environment is always changing, but 2023 was a particularly eventful year, with important consequences for the D&O insurance marketplace. The past year’s many developments also have significant implications for what may lie ahead in 2024 – and possibly for years to come.  I have set out below the Top Ten D&O Stories of 2023, with a focus on future implications. Please note that on Thursday, January 11, 2024 at 11:00 AM EST, my colleagues Marissa Streckfus, Chris Bertola, and I will be conducting a free, hour-long webinar in which we will discuss The Top Ten D&O Stories of 2023. Registration for the webinar can be found here. I hope you can join us for the webinar.

Continue Reading The Top Ten Stories in D&O of 2023

D&O insurers closely track the annual number of securities class action lawsuit filings. The number of annual filings can provide some indication of the insurers’ ultimate loss costs for the year. The current year’s filing patterns can also inform the insurers’ efforts to try to determine the profit-making price for their insurance product.

In 2023, the number of federal court securities class action lawsuits filed increased more than 7% compared to 2022, although the number of federal suit filings still remained well below the elevated levels seen in the recent past. Several factors contributed to the increased number of securities suit filings during the year, including disruption in the banking sector as well as the overall impact of macroeconomic factors.

Continue Reading Federal Court Securities Class Action Lawsuit Filings Increased in 2023
Mark Sutton
Leah Barratt

In the following guest post, the authors examine two specific provisions of the new U.K. Economic Crime and Corporate Transparency Act 2023. The two provisions the authors examine are the Act’s new corporate offense of “failure to prevent fraud” and the reformed “identification principle.” The authors of this guest post are Mark Sutton, Partner at the Clyde & Co law firm, Leah Barratt, Senior Associate at Clyde & Co, and Frederica Johnston, trainee solicitor at Clyde & Co. A version of this article previously was published as a Clyde & Co client alert. I would like to thank the authors for allowing me to publish their article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.

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The Government’s promised crackdown on economic crime looks set to become a legislative reality through the introduction of the U.K. Economic Crime and Corporate Transparency Act (the “Act”).  Two of its most heralded provisions include the new corporate offence of “failure to prevent fraud” and a reformed “identification principle”. Together, they represent the cornerstone of the Government’s policy to increase the criminal accountability of corporate entities. The new U.K. Act received Royal Assent on 26 October 2023 and the reforms to the identification principle will take effect this Boxing Day, 26 December 2023. 

Following our previous article, we discuss below these two key changes brought about by the Act, what the reforms to the identification principle mean in practice, and the Act’s wider implications for entities and their insurers.

The failure to prevent fraud offence

What is the latest update?

In our first article, we explained that the new corporate offence aims to tackle fraud by holding organisations liable if their employees commit a fraudulent act with a view to the organisation itself benefitting. There was intensive debate between the House of Commons and the House of Lords as to which organisations should fall within the scope of the offence. The argument for broader application, to encompass smaller entities as well, was that fraud is indiscriminate: it can be committed by anyone, at any time, irrespective of an organisation’s size or resources. The opposing view was that bringing small or medium-sized enterprises (“SMEs”) within scope would expose those entities to an unfair administrative burden in terms of the added requirements to assess compliance risks under the Act.

The decision ultimately turned on the intended purpose of the offence, which was to improve accountability in larger, more complex organisations. The offence therefore only remains applicable to large organisations, being bodies which satisfy at least two of the three following criteria:

  1. more than £36 million in turnover;
  2. more than £18 million balance sheet total; and/or
  3. more than 250 employees.

However, whether the offence should apply to small and medium-sized organisations still remains under the microscope: the Government has promised to keep the threshold for the offence under review and it has included a delegated power within the Act with which to modify or remove the SME threshold in the future.

How can organisations prepare for the arrival of the new offence?

An organisation will have a defence if it can prove that it either had “reasonable procedures” in place to prevent fraud, or that it was reasonable not to have such procedures (such as where the risk of fraud is extremely low). The effective development and implementation of internal “reasonable procedures” to prevent fraud from taking place will therefore be critical to the new offence’s impact.

The Government has promised to provide guidance on what “reasonable procedures” might look like and we expect this during the first part of 2024. Whilst we await publication of this guidance, the commentary set out in our preceding article remains unchanged. Organisations must undertake extensive risk assessments and review their current fraud prevention practices to determine whether their anti-fraud policy is up to scratch or in need of improvement.

Reforms to the identification principle

The changes brought by the new Act do not end with the introduction of the failure to prevent fraud offence. One of the Act’s most instrumental cultural reforms is, arguably, the development to the identification principle which will come into force on 26 December 2023.

What is the identification principle?

The identification principle is a common law test which for years has only allowed liability to attach to the organisation itself if the offence was committed by an individual representing the “directing mind and will” of that organisation.

The principle has long faced widespread criticism. The company’s “directing mind and will” has usually been restricted in the UK to directors and senior officers.  This has meant that it has been difficult to prosecute larger organisations where the relevant decision-making is apportioned between several individuals across different divisions of the business.

How has the identification principle been amended?

Under Section 196 of the Act, an organisation will now be criminally liable when a “senior manager” has committed the offence. A “senior manager” is defined as being an individual who plays a significant role in:

(a) the making of decisions about how the whole or a substantial part of the body corporate’s activities are to be managed or organised; or

(b) the actual managing or organising of the whole or a substantial part of those activities.

This definition will take into account the relevant individual’s roles and responsibilities within the organisation and their decision-making powers (rather than just their job title). The effect of this is to widen the pool of people who can be caught by the identification principle and with it, the number of individuals who will be capable of attributing criminal liability to their organisation.  Larger entities will therefore be well advised to consider whether mid-level managers and any other employee ranks could be considered a “senior manager” under the identification principle.  If they are, entities may wish to reflect on whether any training is necessary to help them understand their new exposure.

For now, these provisions only apply to the economic crimes listed in Schedule 12 of the Act, which include offences of bribery, fraud and false accounting.   However, further change may be on the horizon: the reforms tabled by the Criminal Justice Bill are likely to extend the identification principle yet further. 

The Criminal Justice Bill makes provision for corporate liability where a senior manager commits an offence whilst acting in the scope of their actual or apparent authority, for any crime.  The Criminal Justice Bill therefore goes further than the Act, which is confined to economic crimes. This means, in simple terms, that prosecutions for any criminal offences committed by senior managers in the course of their employment could be attributed to the organisation, if the Bill is enacted.   

What is the geographical scope of the reformed identification principle?

Unlike the failure to prevent fraud offence, the reformed identification principle will apply to all corporate bodies and partnerships established in the UK. A further distinction is that an organisation will not be liable for a relevant offence if the act or omission in question was carried out outside of the UK, unless the organisation would be guilty of the offence in the overseas country where it was committed.

What will the penalty be for corporations?

If a corporation is criminally convicted under the reformed identification principle, it will face a fine. The maximum fine will vary depending on the particular offence, but corporates risk an unlimited fine for the most serious of crimes. The individuals who are guilty of the same offence can also be subject to a criminal conviction and other penalties.

What are the consequences for the insurance industry?

As we foreshadowed in our previous article, it would be advisable for insureds, brokers and insurers alike to evaluate carefully their D&O and/or civil liability policy wording. Key points to consider might include the “Insured Persons” definition, the policy’s conduct exclusion, and the coverage triggers for pre-/investigation costs.

To reflect the new exposures which senior managers will face under the reformed identification principle, insured entities may also want to ensure that anyone who could be considered a “senior manager” under the reformed identification principle has cover under the entity’s management liability policy.  This means that insureds will need to examine the scope of the Insured Persons definition and confirm whether it extends cover to employees who carry out a senior management function (rather than merely directors and officers of the entity) if that is what is desired by the organisation.

In addition, insureds and brokers may wish to review the policy’s limit of indemnity to ensure it is sufficient to account for the increased exposure that the changes to the identification principle may bring about. 

Of course, the new exposures to entities and individuals do not stop there.  If the further reforms to the identification principle sought by the Criminal Justice Bill are enacted, any criminal offence committed by senior managers acting in their capacity as such could be attributed to the organisation.  The question that naturally follows is whether this exposure is a risk that entities are willing to bear themselves or whether there is a need for the organisation to procure appropriate cover from their insurers for this risk.

Whichever way those questions are answered, it is clear that with the failure to prevent fraud offence poised to come into force in 2024, insureds, brokers and insurers need a strong grasp of how their policies will respond to claims stemming from the new offence because it is only a matter of time before insurers will be called upon to support their clients.

Conclusion

The enactment of the Economic Crime and Corporate Transparency Act indicates the UK Government’s desire to build a strong legislative framework to hold large organisations to account for corporate crime.  Large organisations face a greater exposure for their employees’ actions and during the first part of 2024, large entities should take steps to evaluate whether they have reasonable procedures in place to prevent fraud prior to the Act coming into force.  In the meantime, the reforms to the identification principle will take effect from 26 December 2023 and as is traditional on Boxing Day, employees might once again look to their employer for a festive bonus. This year, senior managers, in particular, may get more than they bargained for.

In a January 25, 2023, opinion in the McDonald’s case that has become known as McDonald’s I, Delaware Vice Chancellor Travis Laster held, as discussed in detail here, that liability for breach of the duty of oversight can extend to corporate officers as well as to directors. While there have been subsequent cases that have raised breach of the duty of oversight claims against officers, there have been no published decisions analyzing the duty of oversight as pertains to officers — that is, until now.

In a short December 14, 2023, opinion that emphasizes the high bar for oversight claims against officers, Vice Chancellor Lori Will dismissed claims that the personal transportation device company Segway brought against its former President. VC Will expressly rejected any suggestion that the standard to plead an oversight breach claim against a corporate officer is any lower than the high standards applicable to oversight claims against directors. A copy of VC Will’s opinion can be found here.

Continue Reading Delaware Court: High Barrier for Oversight Claims Against Officers

In the latest installment in its D&O Insurance videos series, London-based insurer RisingEdge, in a panel discussion of D&O insurance experts, examines the five steps in the D&O insurance policy placement, implementation, and deployment process. The panel, which is moderated by RisingEdge CEO Philippe Gouraud, includes Lianne Gras of Howden; Robert Barnes of GAWS in London; and Ellie Fisher of RisingEdge. The five steps discussed in the video are: Insured Risk Mapping; Preparing the Submission and Engaging with the D&O Market; Quotation and Binding the Policy; The Policy Renewal; and You Have a Claim! The objective of the video is to “unpack and demystify the D&O policy placement process, and to provide these learnings in an accessible format.” The video can be found here.