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Increased Litigation, Tighter Regulation and Enforcement Affecting D&O Insurance Market

Increased Litigation, Tighter Regulation and Enforcement Affecting D&O Insurance MarketD&O Insurance Critical for All Businesses, Entities

A litigious environment, increased federal regulation and oversight, and several high-profile cases with far-reaching implications are impacting the Directors and Officers (D&O) Liability insurance market for small (up to $300 million) to mid-capitalized (between $300 million to $2 billion) businesses. Insurance underwriters are taking a stricter and more disciplined approach to evaluating risks and it’s projected that rates, which began to firm slightly in the fourth-quarter of 2012, will continue to do so in 2013.

Over the last few years, the regulatory landscape has changed with new rules from the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) along with increasing pursuit of alleged violations under the Foreign Corrupt Practices Act (FCPA) by those agencies. We’ve also had the Jobs Act passed in April 2012 designed to help start-ups, placing companies into unknown territory regarding their liability and D&O insurance.

When it comes to headline-making lawsuits, we’ve had the Libor (London Interbank Offered Rate) scandal in which interests rates were manipulated. Among several suits, one was filed against Barclays and two of its subsidiaries, and named the former chairman and the CEO of the bank as defendants. We’ve had a securities class lawsuit filed against Facebook and its CEO and CFO as a result of its IPO and alleged non-disclosures that affected a drop in shares. MF Global Holdings made news in 2011 when it went bankrupt and the SEC began an investigation into the company’s accounting treatment that helped to mask its exposure to risky foreign sovereign debt.

In addition, we have seen an uptick in the number of lawsuits involving mergers and acquisitions. Lawsuits typically include shareholder objections over a merger or acquisition that allege the directors and officers of a company were not looking out for their best interest when they agreed to the terms and conditions of a transaction. In fact, according to recent findings by Cornerstone Research, in 2012, plaintiff law firms filed lawsuits on behalf of shareholders in 96% of M&A deals valued over $500 million and in 93% of transactions valued over $100 million. In addition, deals valued at over $500 million averaged more than five lawsuits per deal.

Minority shareholders, who are often employees, also file suits claiming that shareholders/board members of private entities pursued a deal that benefited them at the expense of minority shareholders. Sometimes a suit can also involve a partner who claims to have been damaged because of a merger, and sues for breach of contract or tortuous interference.

Litigation regarding insider training and executive compensation also continues to be of great concern. In addition, whistleblower activity is an ongoing worry as a result of the Dodd-Frank Reform and Consumer Protection Act of 2010 (“DFA”) and the new whistleblower protection and reward program under that statute. In fact, the SEC’s latest annual report on the DFA whistleblower protection program states that the agency received 3,001 whistleblower reports in 2012, and virtually all of these remain pending. This means that the growth of these claims most likely hasn’t peaked. Further, in September of 2012, the SEC announced its whistleblower fund has set aside more than $453.4 million to reward whistleblowers.

As the D&O landscape changes with emerging risks, tighter regulations and increased litigation, Axis Insurance Services, LLC is strongly positioned to work with our clients. We partner with several top-rated insurers to place the coverage a business needs. What’s more, our focused expertise enables us to help our clients receive optimal results with their insurance program. Give us a call at: (877) 787-5258.

Sources: Marsh, Property/Casualty 360, SEC, Cornerstone Research

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Blogged on: March 5, 2013 by Mike Smith
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