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D&O Survey Cites Regulatory Claims As A Top Concern


D&O Survey Cites Regulatory Claims As A Top ConcernShareholder and Employment-Related D&O Suits Also Top List

A survey of organizations on their Directors & Officers (D&O) insurance conducted by JLT Park indicates that regulatory claims are increasingly a top concern for corporations, alongside shareholder and employment-related suits. The companies that participated in the survey, which was taken between October 2013 and February 2014, include a broad array of industry segments, including manufacturing, insurance, financial services and energy and utilities and non-profits.

The survey took a look at the type of claims experienced by public, private and non-profit organizations. Derivative shareholder/investor suits and direct shareholder suits are the leading cause of D&O claims for public corporations. Private companies experienced employment-related derivative shareholder/investor suits, and direct shareholder/investor suits, among others. For non-profits, the leading types of claims are employment-related. The types of claims experienced in each group are consistent with previous years. But also evident, according to the survey, is rising concerns over regulatory issues.

A look at the type of D&O claims

Shareholder derivative rights allow someone who owns stock in a company to sue on behalf of the company when the company’s board refuses to do so itself. Because the company is the one who’s been wronged, if the shareholder derivative suit is successful, the company, rather than the shareholder, will receive any award granted by the court. An example of a derivative claim involved videogame company Activision Blizzard where it agreed last November to pay $279 million to settle suit related to its stock buyback from Vivendi. This was the largest derivative settlement to date. Another example is Newscorp, which agreed to settle shareholder derivative litigation for $139 million after claims that directors failed to avert its hacking scandal.

Shareholders can also protect their ownership rights in their shares by bringing a direct action against a corporation. These direct shareholder suits may involve contract rights related to the shares; rights granted to the shareholder in a statute; rights related to the recovery of dividends; and rights to examine the books and records of a corporation.

Employment-related D&O claims involve harassment, discrimination and wrongful termination suits, and are the cause of the majority of exposure for smaller to mid-size organizations.

Regulatory claims are brought by any governmental, quasi-governmental, or self-regulatory agency.  Over the past several years, regulatory enforcement has tightened with a rise in claims in this area. In fact, it’s not only public companies that are facing increased scrutiny; private companies also all under the regulatory oversight of a variety of federal and state agencies. Some regulations are specific to certain industries such as healthcare and financial services, but others, such as those dealing with competition, cut across all industries. Even the Security Exchange Commission (SEC), which typically is viewed as strictly a public company regulatory agency, can have jurisdiction over private companies under certain circumstances. Among the regulatory agencies that are increasing their scrutiny of private companies are the Department of Labor, the National Labor Relations Board and the Federal Trade Commission.

Directors & Officers Liability insurance can be designed to provide protection to companies, their executive officers, and their board members for the types of claims discussed here. A policy covers insureds for claims made by third parties alleging acts, errors, omissions, misstatements and misleading statements by board members and corporate officers. Based on specific terms and conditions of a policy, D&O not only will indemnify insureds for settlements with third parties, but also for defense costs, which often can exceed the cost of settlements. At Axis Insurance Services, we specialize in D&O insurance and can help you with obtain the coverage you need to protect your organization. Give us a call at (877) 787-5258.

 

Sources: JLT Park, Marsh, Advisen

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Blogged on: March 31, 2015 by Mike Smith
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