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Column
As companies caught ‘financial flu,’ liability risk rose. A few educated guesses about what’s ahead. By Evan Rosenberg If you, as a board director, had been stranded on a desert island for the past year, and you were rescued today, you might not recognize the financial world to which you returned. For one thing, your chances of being hit with a directors and officers (D&O) liability lawsuit have probably increased. What happened? Well, while you were gone … • A credit crisis hit the U.S. financial markets. A sudden rise in subprime mortgage foreclosures exposed flaws in aggressive mortgage financing practices and negatively impacted the banking, real estate, and homebuilding sectors. • The credit crisis spread to additional sectors. The U.S. economy caught a “financial flu” as the subprime mortgage virus spread through dozens (and counting) of business sectors. • The crisis went global. Repercussions spread far outside the U.S. as foreign financial institutions the world over caught the financial flu. Effective treatments (let alone a cure) proved elusive as the crisis grew in complexity. • Global stock markets responded with volatility. As the financial flu spread and the U.S. economy faltered, stock prices fell. At a time when corporations had been repairing their reputations with improved financial disclosure and controls, many seemed to be blindsided by the economic crisis and struggled to keep up with financial events. • Securities lawsuits, which had seemingly stabilized, abruptly rose to ‘normal’ levels. Cornerstone Research reported 100 securities class action filings in the second half of 2007, reversing a trend of eight consecutive quarters with below-average litigation activity. And NERA Economic Consulting reported the average securities class action settlement hit an all-time high of $33.2 million in 2007, higher than the 2002-2007 average of $24.4 million. Driven by stock market volatility, the increase in D&O liability lawsuits extended well beyond the financial sector. • Meanwhile, many countries enacted securities legislation and promulgated new rules and regulations, potentially broadening D&O liability exposures for multinational corporations. D&O liability insurance policies offering worldwide coverage are now being constructed in conjunction with locally admitted D&O policies outside the home country. This furthers the scope of coverage to address local country laws and risks. For multinational companies, the fast-evolving global insurance environment now means solving increasingly complex D&O liability issues with ever more sophisticated coverage solutions. But there was some moderately good D&O liability news: The U.S. Supreme Court continued to set a positive tone for business with two landmark decisions. In June 2007, the court’s decision in Tellabs Inc. v. Makor Issues & Rights Ltd. set a consistent standard for securities litigation pleadings, while its January 2008 decision in Stoneridge Investments Partners, LLC v. Scientific Atlanta affirmed protection for third-party defendants. Even so, experts don’t expect the decisions to have much impact on the number — and especially the severity — of securities lawsuits. Coming Expectations Predicting where D&O liability is headed is perilous, but here are a few educated guesses about what you might expect in the coming year: • Stock markets will probably continue to be turbulent. • The weakened U.S. economy will impact public and private companies and not-for-profit organizations alike. • Securities claims will remain at “historic” levels. • D&O liability insurers will look ever more closely at how companies deal with financial issues. • Pricing in the competitive D&O liability insurance marketplace could begin to stabilize as the new wave of securities lawsuits begins to make its way through the settlement cycle. • Cyber security issues may become more closely linked to D&O liability. Clearly, corporate management today is under enormous pressure to safely navigate through this stormy environment. Consulting with general counsel is critical to helping directors and officers steer clear of potential rough waters ahead; working with a D&O insurance company with financial fortitude is also an imperative. |
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| Evan
Rosenberg is a senior vice president and Global Specialty Lines manager
for Chubb & Son. He can be
contacted at erosenberg@chubb.com. Copyright © 2008 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
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