Session INS 201: Trends in D&O - Say it Ain't So

Litigation connected to the collapse of the subprime market, more institutional investors deciding to opt out of class action lawsuits, and more aggressive prosecutions by state and federal authorities has led to an increase in the severity and frequency of directors’ and officers’ liability lawsuits, according to ACE USA’s chief counsel.

“The end result is that executives and corporations today are faced with defending more complex litigation on more varied fronts, which is costly and compromising,” according to Zacharias, author of a recent report on the subject. “D&O litigation is back, and appears to be poised to continue unabated in the near future.”

The percentage of cases settling for more than $100 million has grown from 1.7 percent in 1998 to 5.2 percent in 2003 to 8.1 percent in 2007, according to her study, titled “The Return of D&O: Trends Driving Increasing Costs and Frequency of Litigation Against Corporate Directors and Officers.” The report was released at the annual conference of the Risk and Insurance Management Society Inc. in San Diego.

Excluding settlement of more than $1 billion, median settlements in 2007 increased by 37 percent, $9.6 million from $7.0 million in 2006, and average settlements increased 46 percent, to $33.2 million in 2007 from $22.7 million in 2006.

While the volume of cases settling for less than $10 million, there are a higher percent of cases setting in the higher damage brackets, said Zacharias.

Another trend, said Zacharias, was the increasing likelihood of institutional investors to opt out of the class action status, in an attempt to seek retribution on their own. Zacharias blamed the heavy lobbying efforts of plaintiffs lawyers.

Institutional investors opt out because they can get a larger settlement on their own, they can negotiate lower attorneys fees, and they feel a duty to investors to recover as much as they can rather than settle for cents on the dollar. In the case of public pension funds, it may even be a way to jockey for political attention, she said.

The early opt-out case used as a benchmark is Worldcom, in which eight institutional investors who decided to opt out recovered $651 million. The Worldcom case was followed by AOL-Time Warner with nine opt-out institutional investors recovering $795 million. In the Qwest case, the entire class of plaintiffs settled for $400 million, but some of the opted-out institutional investors settled for $411 million, according to the report.

Some industries are at higher risk of litigation than others: One quarter of the 2007 cases filed were brought against technology companies, 13 percent were filed against pharmaceutical companies, and 21 percent were filed against the banking/brokerage/financial services sectors, the report also found. CEOs and CFOs are sued more often than other executives in securities class actions. Committees are much less likely to be sued.

“The size of a company is not necessarily a determinant as to whether the company will be subject to a securities class action,” the report also said.