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Shareholder class actions unsettling D&O insurers

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Regulatory scrutiny and class action activity have D&O insurers unsettled, making placements more difficult and driving up premiums, according to Gallagher’s National Head of Financial & Professional Risks, Michael Herron.

“Some insurers are reducing risks and others are withdrawing from the market completely,” says Herron. "Brokers are working harder to achieve placements and are being forced across a wider pool of insurers, which is also pushing premiums up.

“Placements have become more difficult and much more expensive, with insurers seeking premium increases of between 40-400%, as flagged by The Australian Financial Review in June. This is where brokers can make a big difference in influencing outcomes and securing more limited premium increases well within this range."

While D&O policies are ostensibly designed for directors and officers, it is the add-on company securities cover (Side C) for shareholder class actions against the company that is driving D&O insurer payouts, he says.

Class actions as investments

No Australian securities class action has ever reached final court judgement for finding liability. The majority have been settled in order to cap expenses, at an average total insurance of $40 million per case to date.

The legal protocols designed to facilitate class actions have also attracted third-party litigation funders and increased the frequency of claims, in some cases with multiple actions brought by competing plaintiff firms – and competing litigation investors. As a result insurers are defending more and more D&O claims and they are alarmed by the financial consequences.

Full disclosure

shutterstock_525950377A contributing factor is the broad basis for determining executive misconduct. Inaccurate or incomplete statements can manifest as misleading and deceptive conduct in failing to disclose certain information, with a breach of ASX continuous disclosure obligations forming the basis for most Australian shareholder class actions. No proof of intent to defraud shareholders is required, rather the charge rests on interpretation of how information or lack of it has been received.

The key question considered by D&O insurers is whether information pertaining to issues that may be latent in a business for a period of time and are known by executives to be a problem has been disclosed to key stakeholders.

Defusing risks through early preparation

What is catching boards out is the timing: the potential for an issue to become market sensitive and when this information should be disclosed. Typically, it is a corporate shock that generates a D&O claim.

Consequently insurers want to know what could come as a surprise to a client’s stakeholders, and the extent to which a company can mitigate or avoid that risk.

"Companies should start preparing early, because negotiations are based on performance analysis, particularly over the previous 12 months, but with reference to trading highs/lows over three years," says Herron.

“The question companies need to consider is how they can unpack their perceived risk and represent their situation in a way that compels insurers to recognise their strengths,” says Herron.

“They also need to be strategic when they go to market. It may be of benefit to set renewal dates with one eye on financial reporting and corporate activity to obtain an optimum outcome. It’s a balance that requires strategy and real thoughtfulness on the part of the broker.”

This subject is explored in greater detail in the latest Gallagher Market Overview Report, Trust & Data: Into the Breach, which was published on 30 July. The report is available as a digital download.

Access the interactive online version of the report here


 

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