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D&O Claims on the Rise for Small Private and Non-Profit Companies

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New research from Advisen indicates that over the past decade, small private and non-profit businesses have had the largest share of Directors & Officers (D&O) losses and loss increase in terms of company size. In fact, over the last 10 years, losses involving small companies increased three-fold. Seventy percent (70%) of D&O claims were filed by small businesses as compared to mid-sized businesses (14%) and large companies (16%). Moreover, according to Advisen, the median loss for companies is $525,000. Small companies in the report are defined as those having fewer than 100 employees, medium companies are those comprised of 100-500 employees, and large companies employ more than 500 employees.

The type of claims on the rise for small companies and non-profits is similar to what their larger counterparts face and include issues involving capital regulatory actions, antitrust, securities individual action, bribery, and price fixing. Capital regulatory actions top the list of claims and, as defined in the Advisen report, are those brought against companies (and their directors and officers) by the Securities and Exchange Commission (SEC) and other bodies that regulate raising capital. This area has heated up over the last couple of years, not surprisingly, due to the SEC’s increased focus under Chair Mary Jo White. Capital regulatory actions are the leading source of claims for mid-size companies, as well.

Also according to the report, as securities litigation increasingly involves smaller companies, average and median securities lawsuit settlements are naturally shrinking. The cases are smaller with fewer dollars at stake due to the smaller size of the companies. This is underscored by analysis performed recently by PwC. The accounting firm found that two-thirds (66%) of all companies named as defendants in securities suits in 2014 were “small-cap” companies. About one quarter of all 2014 securities suit filings involved “micro-cap” companies (market caps under $300 million). This trend continued in 2015, according to The D&O Diary, which noted that about 48% of the companies sued most recently had market capitalizations under $750 million. Moreover, according to a Cornerstone Research report, the number of securities suit settlements during 2014 (63) was just about the same as the number in 2013 (66). However, the aggregate amount of all securities class action lawsuit settlements during 2014 was $1.068 billion, compared to $4.847 billion in 2013, a decline of 78%. The 2014 aggregate total is the lowest in 16 years and was also 84% below the annual average for the prior nine years.

Important in all of these findings is the need for small private and non-profit companies to closely examine their practices and D&O insurance. A D&O Liability policy is designed to provide financial protection for managers against the consequences of actual or alleged “wrongful acts” when acting in the scope of their managerial duties. It pays for defense costs and financial losses. In addition, extensions to many D&O policies also cover costs for managers generated by administrative and criminal proceedings or in the course of investigations by regulators or criminal prosecutors. Note that these coverage extensions are gaining greater importance among company directors. By adding these extensions, managers will benefit from having comprehensive, integrated coverage that ensures a reliable, consistent and structured legal defense.

RPS can help you structure a D&O insurance product that meets the needs of your clients and their leadership.

Sources: Advisen, PwC, The D&O Diary

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