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Risk Adviser
Litigation Trends Could Set D&O Market on Stormy Course

Derivative litigation continues to be one of the major exposures for directors and officers insurance.
  • Lance Ewing
  • October 2021
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Onur Dogman/Getty Images

Onur Dogman/Getty Images

An ousted CEO decides to help the newly appointed CEO in his last few days at the helm. “I've left you two envelopes on your desk,” the departing CEO said. “When you hit your first major crisis, open the first envelope. If you run into greater trouble later, open the second one.”

Three months into his role, the newly minted CEO hits a crisis. He opened the envelope marked No. 1. The note inside said, “Blame me.” It worked like a charm. A few months later, the stock of the company nosedived and the board was furious. The first-year CEO opened the second envelope. This note read, “Prepare two envelopes.” Or so the story goes.

Related: AM Best: Rise in Litigation Complicates Improving Directors and Officers Market

Directors and officers are always looking for protection not just for the entity but for themselves as well. As many in the insurance world are aware, directors and officers (D&O) insurance did not get its true start until after the stock market crash of 1929. Prior to the crash, no such policies were available. The appeal for corporations to embrace and buy D&O coverage didn't emerge until the late 1940s and then took a meteoric rise in the 1960s when many mergers and acquisitions plus several bankruptcies began to see litigation escalate. The plaintiffs' lawyers had arrived.

What does 2022 hold for the D&O marketplace? Many issues have driven D&O claims since the early days and derivative litigation continues to be one of the major exposures for D&O. While the directors and officers want to maintain a more historical D&O program with tower limits for defending derivative lawsuits, many companies today are increasingly shifting the allocation of “complete ABC” limits to a higher percentage of A-side-only coverage. This provides less balance sheet protection but more personal liability coverage to the individuals.

An example of such a claim occurred when New York State Comptroller Thomas DiNapoli filed a derivative lawsuit against the board of directors of Wynn Resorts Ltd. The lawsuit accused the board of not doing anything to stop then-CEO Steve Wynn's alleged sexual misconduct. The lawsuit was filed on behalf of the company against the board members.

It appears that derivative litigation and defense will continue to develop into 2022.

Related: D&O Writers Brace for Wave of Costly Diversity Lawsuits

Chris Crawford, senior vice president and client executive at Marsh, believes that another emerging risk for D&O in 2022 is de-SPAC and IPO litigation. Crawford states that 27% of 2018 IPOs were hit with class-action securities litigation within the three-year window of their offering and over 17% of closed de-SPAC offerings in the past 18 months have been the subject of securities claims. “With over 300 SPACs looking to close transactions and take companies public and a continued hot IPO market, class-action litigation against companies undertaking public offerings will likely see 2022 with continued rising D&O premiums and retentions to levels that already have large corporations self-insuring the first $15 million of D&O coverage,” according to Crawford.

An added exposure for boards and company officers is a direct focus on board diversity. Litigation has popped up against businesses with accusations that directors and officers have breached their duties by making false assertions about their commitment to diversity, equity and inclusion. Several states and the NASDAQ have enacted requirements for minimum board seat representation. Moreover, shareholder activism is highlighting diversity initiatives against public companies, and how current D&O policies will respond is a growing concern not just for the board but also for the insurance carriers.

Carriers, directors, officers and shareholders all need to be prepared for what could be a tumultuous D&O marketplace in 2022.


Best’s Review columnist Lance Ewing is vice president, enterprise risk management and operations for the San Manuel Band of Mission Indians. He also is a former president of the Risk and Insurance Management Society. He can be reached at bestreviewcomment@ambest.com.


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