Legal costs and derivative settlements continue to rise

US securities class action filings, historically a major driver for directors and officers (D&O) insurance claims globally fell in 2021, and were well below the elevated levels seen between 2017 and 2019, in large part due to the decline in merger objection lawsuits. However, a number of trends are likely to keep D&O claims elevated for the foreseeable future.

Despite a reduction in 2021, securities class action filings are still above historical levels, and there are even signs that the value of class action settlements may be increasing, while a growing number of jurisdictions are allowing class, and other forms of collective, actions, including China and Saudi Arabia. The growth of so-called Special Purpose Acquisition Companies (SPACs) – also known as blank-cheque companies – has also generated a number of losses for the D&O market. At least 25 companies that merged with SPACS between 2020 and 2021 have issued so-called going-concern warnings in recent months, according to research firm, Audit Analytics [1].

According to Angela Sivilli, Co-Head of Global Practice Group for Commercial D&O and Financial Institutions Claims at AGCS, higher settlements for shareholder derivative actions and rising defense and containment costs are two notable trends driving the cost of D&O claims.

“Claims severity has gone up. For example, shareholder derivative lawsuits typically result in small settlements or corporate therapeutics, like changes to the board. Now we see these cases settle for several hundreds of millions of dollars. We are also seeing larger settlements for cases in arbitration,” says Sivilli.

Litigation risk continues to be a top D&O concern, according to David Ackerman, Co-Head of Global Practice Group for Commercial D&O and Financial Institutions Claims at AGCS. Over the past two and half years, a group of plaintiffs’ firms filed more than 10 derivative lawsuits in New York state courts on behalf of shareholders of non-US companies pointing to heightened US litigation risk for directors and officers of non-US domiciled companies. While the recent dismissal of two of these cases may serve to stem this trend, it should be noted that the same judge who dismissed one of these lawsuits earlier had denied a motion to dismiss another derivative suit involving a non-US domiciled company. At the very least, this risk bears watching, Ackerman notes.

Legal and defense costs continue to rise, a trend that will no doubt accelerate with inflationary pressures on salaries and fees. D&O insurers’ defense costs increased 39% in 2019 and 14% in 2020, falling back to just 4% in 2021, although this may have reflected delays in court cases during the pandemic, according to AM Best [2].

“Attorney fees continue to rise, and we have seen big increases in hourly rates at leading firms. Partners’ fees can be as high as $1,800 per hour, compared with $1,000 just five years ago. With the US inflation rate now at over 8%, legal costs are likely to rise further,” says Sivilli.

D&O losses continue to be dominated by so-called event-driven claims, although accounting issues and insolvency remain an important driver for many claims. Recent years have seen large D&O claims arising from a wide range of events, including natural catastrophes, the Covid-19 pandemic, air crashes, emissions scandals, cyber-attacks and product liability. “Almost every D&O claim is now driven by an event or a merger,” says Sivilli.