Risk Adviser
The Rise and Rise of D&O
Corporations and their insurers must deploy risk mitigation strategies to rein in pricey lawsuits.
- Paul Horgan
- November 2019
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Directors and officers insurance is being pushed to the breaking point, and two concurrent trends are causing it to buckle.
One is the growing risk that corporate boards will face federal class-action securities fraud litigation; the other is the skyrocketing cost to defend against these lawsuits.
Corporations today are constantly on the defensive against plaintiffs' attorneys, who are quick to file federal class-action securities fraud lawsuits that reap increasingly bountiful rewards.
In the last few years, the number of federal class-action securities fraud lawsuits has spiked significantly. This year has already seen the fourth-highest number of federal class-action securities fraud lawsuits—274 and counting by mid-September. (The annual average from 2007 to 2016 is 189.)
The target for these lawsuits has evolved over the years from the corporations to the officers and directors of the corporations. Today, each board member is at risk of being a defendant in class-action litigation. The very existence of D&O insurance makes them an attractive target.
A shift in where lawsuits are filed has added a new layer of complexity—and cost. Corporations, their boards and their D&O insurers are increasingly forced to defend against merger-objection lawsuits in federal courts. Court decisions in 2015 and 2016 in Delaware made that state inhospitable to plaintiffs bringing merger and acquisition lawsuits, which led to a rise in federal filings. In 2017, three-fourths of deals exceeding $100 million resulted in federal lawsuit.
Even as the frequency of litigation rises, so does the costs to defend each lawsuit. Several factors are to blame.
One is the number of lawyers now involved. There was a time when just one or two attorneys represented the board and the corporation against such lawsuits. Now, it is not uncommon for each individual officer or director to retain their own counsel, multiplying the costs.
In addition, attorney's fees have more than doubled in the past 15 years. Back then, legal representation might have cost about $700 an hour. Today, it's often $1,500, and some firms are asking for as much as $2,000 an hour.
These rising costs cannot go unabated. Fortunately, corporations and their D&O insurers can work together to help bring costs down.
Some corporations control costs with litigation guidelines that specify the firms that they will work with. Others simply bid out the work to law firms, creating a competition that often brings lower-priced bids.
A long-term solution to reduce litigation costs is to lobby for policy reform and reverse the devastating impact of the Cyan decision.
Without going into too much detail, Cyan v. Beaver County Employees Retirement Fund, opened the door for plaintiffs to shop around for friendly jurisdictions. Because of this U.S. Supreme Court ruling, IPO companies now face the possibility of having to fight securities litigation in multiple jurisdictions and in multiple state courts at the same time. The rise in IPO–related lawsuits being brought in both state and federal courts is a direct result of this decision. These cases now are often more complicated to litigate and resolve and, therefore, more expensive.
If D&O insurance is going to remain a viable solution to help protect corporations and their board members, they will need to work together to rein in the rising cost of litigation.
Best’s Review contributor Paul Horgan, is head of North America Commercial Insurance, Zurich North America. He can be reached at paul.horgan@zurichna.com.
