Advisen, a leading provider of data, media, and technology solutions for the commercial property and casualty insurance market, released its analysis of Directors & Officers (D&O) claims for 2016, citing some interesting findings for 2016. The first of these findings was a spike in securities class action (SCA) cases with the number of companies facing lawsuits reaching an all-time high. For example, 209 companies faced SCA suits in 2016 as compared to 178 in 2015, according to Advisen, which reviewed D&O loss data of nearly 45,000 cases. Cornerstone Research also cites an increase in securities class action cases in a separate report, saying that U.S. courts approved the highest number of these types of settlements in 2016 since 2010. According to Cornerstone, the $6 billion of approved SCA settlements was nearly double the total settlement value in 2015, fueled by 10 huge settlements ($100 million or more), which accounted for 81% of all settlement dollars. The number of mega settlements in 2016 was the highest in 10 years and included two settlements over $1 billion.
Moreover, financial institutions, which traditionally accounted for the majority of SCA filings and reached their height during the financial crisis, in recent years have seen a downward trend in suits. On the flip side, SCA filings in the pharmaceutical industry have been steadily increasing, reaching an all-time high in 2016, cites Advisen.
According to the Advisen report, there was also an increase in D&O lawsuits against smaller companies in 2016. Previously viewed as less risky, this perception is now changing with small firms facing more lawsuits. There was also greater focus on IPO-related litigation. In fact, the likelihood of a suit being led within three years of an IPO has increased significantly since 2008, says Advisen.
What does the D&O landscape look like now?
According to a recent report by Marsh, potential deregulation for financial institutions and other organizations under the new Trump administration could mean fewer corporate penalties, however, it can also lead to a rise in claims due to less transparency and “mandate corporate guidelines”. An increase in shareholder activism could also lead to more litigation, particularly for smaller companies that have historically lagged with regards to governance policies promoting shareholder engagement. The lack of shareholder-friendly policies in smaller companies in fact may also be a factor in the increased number of shareholder litigation lawsuits against smaller companies in 2016.
Lawsuits as a result of M&As as well as other collaborations involving joint ventures, partnerships, and alliances will continue in 2017. Companies should review their D&O policies to make sure all types of structures are covered in the event of a suit.
Cyber-related issues continue to loom large across all industry sectors. “It seems clear with increasing regulatory scrutiny around cyber security and data privacy, the increasing proliferation and expansion of laws and regulations on the subject, and increasing attention to cyber security and data privacy-related due diligence issues in the M&A context, that directors and officers are more likely to come under fire," cites Roberta Anderson, partner at law firm K&L Gates LLP. "They will face more liability in the form of regulatory actions, class actions and shareholder derivative suits."
RPS specializes in D&O solutions for all types of companies, including for-profit businesses, privately held firms, not-for-profit organizations, and educational institutions.