{"id":105183,"date":"2019-01-20T03:07:10","date_gmt":"2019-01-20T03:07:10","guid":{"rendered":"http:\/\/dominiclevent.com\/blog\/?p=105183"},"modified":"2020-01-22T09:34:37","modified_gmt":"2020-01-22T09:34:37","slug":"do-litigation-from-mismanagement-to-misstatement-claims-insurance-business","status":"publish","type":"post","link":"https:\/\/dominiclevent.com\/blog\/do-litigation-from-mismanagement-to-misstatement-claims-insurance-business\/","title":{"rendered":"D&O litigation: From mismanagement to misstatement claims – Insurance Business"},"content":{"rendered":"


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Event-driven litigation is changing the game for public company directors & officers (D&O) insurance. Shareholders today are using loss-driving events, such as sexual harassment claims, data breaches, or even physical fires, to bring securities class action lawsuits against public companies in the US. This has resulted in unprecedented levels of public company D&O litigation, both from a frequency and a cost perspective.\u00a0<\/p>\n

Securities laws are governed by the Securities and Exchange Commission (SEC) and they exist to protect investors, maintain fair markets, and facilitate capital formation. Essentially, their primary purpose is to provide transparency and prevent misstatements so that investors have all the information they need to make an investment decision. These laws were not created to prevent organizational mismanagement (often the root cause of event-driven litigation), and yet, plaintiff attorneys are managing to blur the lines and bring securities class action lawsuits over significant events.\u00a0 \u00a0<\/p>\n

Read more: Small museums \u2018anxious\u2019 about their D&O exposures<\/a><\/p>\n

\u201cThis is a very difficult burden for public corporations to carry,\u201d said Kevin Gadbois, executive vice president of claims, executive liability of Great American Insurance Group. \u201cWhereas an event like a fire or a data breach used to be a derivative case that was protected by the business judgment rule – which states that as long as you run your company in good faith, you\u2019re protected from a liability lawsuit \u2013 now it\u2019s being treated as a misstatement or nondisclosure case. \u00a0\u00a0<\/p>\n

\u201cPlaintiffs are essentially saying: \u2018We\u2019re not suing you on the business judgment rule. But every time your business doesn\u2019t perform the way it should, we\u2019re going to sue you for nondisclosure because you didn\u2019t tell us that ahead of time.\u2019 That\u2019s a very difficult standard to hold directors and officers to. It takes out the business judgment rule and turns the suit into a \u2018Who said what, and when?\u2019 type of claim \u2013 and the plaintiff\u2019s bar can extract huge settlements on that type of litigation.\u201d<\/p>\n

There has been a sharp rise in cyber-related event-driven litigation in recent years. Public companies are spending astronomical sums of money, time and effort on shoring up their cyber defenses and making sure their systems are secure. They\u2019re disclosing these actions to the market and to their shareholders, and they\u2019re being transparent about the steps they\u2019re taking to protect information. And yet, the ever-evolving nature of cyber risk dictates that even the most prepared companies can suffer a data breach. If and when that happens, shareholders are now able to turn that data breach event into a nondisclosure claim by arguing that the company didn\u2019t tell them their procedures and their defenses might not be good enough.<\/p>\n

\u201cPlaintiff attorneys have been able to successfully turn mismanagement claims into misstatement claims, and that\u2019s very difficult for insurers because we can\u2019t underwrite to that,\u201d Gadbois told Insurance Business<\/em>. \u201cWe underwrite in the D&O world by looking at financial statements and assuming they\u2019re correct. It\u2019s very difficult for us to ask what a company is doing about data security, to listen to the efforts they\u2019ve made, and then question: \u2018What if you\u2019re wrong? And did you tell your shareholders you might be wrong?\u2019 That\u2019s a very hard thing to underwrite because it\u2019s an unknown.\u201d<\/p>\n

Read next: D&O litigation reaches \u2018unprecedented levels\u2019<\/a><\/p>\n

As an example, Gadbois pointed toward the opioid situation in the US. Nobody is alleging that the huge drug companies lied about the amount of drugs they were selling. Their financial statements were accurate, the revenue figures they provided were accurate, and shareholders could look behind those revenue figures and see where revenue was coming from.<\/p>\n

\u201cFor shareholders to now come back and say: \u2018We\u2019re not suing you because you lied to us about the amount of drugs you\u2019re selling. We\u2019re suing you because of the harm that it caused on society. Also, you should have told us that selling these drugs could have further societal implications.\u2019 That\u2019s very difficult for a drug company to do, and it\u2019s very difficult for insurers to underwrite to,\u201d Gadbois commented.<\/p>\n

The current litigation environment is quite the minefield for public companies in the US. Those unfortunate enough to get caught up in a securities class action suit face what most would deem to be a lose-lose situation. Many choose to settle rather than fight suits because of the huge defense costs they would have to pay. As Gadbois put it, the US legal system is \u201cnot set up to efficiently resolve problems.\u201d<\/p>\n

\u201cIt\u2019s a very expensive system to navigate, so companies are forced to settle due to the astronomical cost of the litigation itself,\u201d he said. \u201cIt\u2019s all about the unknown at the end of the day. If you\u2019re involved in an opioid lawsuit and you\u2019re being sued for billions of dollars, it\u2019s a very difficult case to try, because if you lose, that could destroy the company. Public companies settle 99.9% of the time because the cost of litigating these suits and the risk of losing them is very problematic.\u201d \u00a0\u00a0<\/p>\n<\/p><\/div>\n


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