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Risk Adviser
The D&O Gamble

Plaintiff’s attorneys may have the upper hand in litigation, but insurers can turn the odds.
  • Paul Horgan
  • December 2020
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In gambling, it is said, the house always wins. The casino maintains the upper hand, even if one lucky bettor walks away with a jackpot.

When it comes to directors and officers litigation, plaintiff's attorneys are holding all the cards and usually end up cashing in the chips.

The good news for corporations and their insurance providers is that the tables are starting to tilt in their favor. More than half of D&O lawsuits are tossed. And a California state court recently dismissed IPO litigation against a medical device company, stating it can't consider the case because of a provision in its certificate of incorporation that says litigation must be filed in federal court.

But there's still a long way to go before D&O insurance can do what it is intended to do—protect the personal assets of directors and officers from lawsuits—and do so affordably.

Plaintiff's attorneys gained the upper hand by remaining one step ahead of everyone else. They learned they don't need to win every time, and a quick settlement before trial saves on expenses and can still reap a profit. Since 1996, less than a half-percent of D&O lawsuits have gone to trial, largely because companies settle after the motion-to-dismiss stage to avoid bad publicity.

D&O claims have been on the rise, fueled largely by event-driven litigation. Think of the massive data breaches that expose customers' personal information and can have a direct impact on shareholder value. Or the #MeToo movement, which has unmasked sexual misdeeds that have brought shame, lost business and costly lawsuits to companies.

We have yet to comprehend all the ways that COVID-19 may lead to D&O litigation but there have been at least 16 COVID-related securities class-action suits and at least 88 companies have filed for Chapter 11 bankruptcy protection in 2020. Growing protests about social injustice have also led to claims that corporate boards lack racial diversity despite proclamations about “diversity and inclusion.”

Even a failed merger or acquisition can prompt a D&O claim from shareholders who feel that the actions of the company's board and executives denied them a significant revenue gain.

Legal costs are rising, too. Attorneys fees have more than doubled in the past 15 years. With each new D&O claim the number of lawyers seems to multiply. It is not uncommon now for each individual officer or director to retain their own counsel.

It's impossible to look at what is going on in D&O insurance without considering the impact of social inflation—the relatively new trend of rising insurance costs due to increased litigation, plaintiff-friendly judgments and higher jury awards.

Changing demographics and attitudes have created jurors who care less about facts and laws, who distrust big companies and science, and who are inclined to render big awards to plaintiffs they feel are sympathetic.

Efforts to level the D&O playing field may seem hopeless but defense attorneys are starting to make headway. They're employing many of the same tactics that plaintiff's attorneys have perfected—like using mock-up videos to add visual elements to their arguments.

And they're advising their clients to fight back. Rolling over and settling lawsuits to avoid trial, it seems, is just making things worse.

Insurers, too, are putting pressure on their D&O customers to engage them in helping to manage losses. They're seeking higher retentions and co-insurance. And rates are going up as capacity shrinks.

D&O insurance remains a critical tool to help protect corporations and their boards from costly litigation. But the ultimate outcome shouldn't be left to chance. With a carefully considered defense strategy and some skin in the game, companies and their insurers can walk confidently into court knowing that Lady Luck may smile upon them.


Best’s Review contributor Paul Horgan is Head of U.S. Commercial Insurance, Zurich North America. He can be reached at paul.horgan@zurichna.com.



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