Advisen: EU Companies Wary Of U.S. Court System, D&O Claims

NU Online News Service, Oct. 11, 2:12 p.m. EDT

European compa­nies doing business in the U.S. are vulnerable to securities legal action in the U.S., especially if their shares are traded on U.S. exchanges and that number is rising, according to a report from Advisen.

The number of lawsuits reflects a trend where shareholder lawsuits filed in European courts are on the rise, prompting demand for directors and officers coverage, according to an Advisen study, “European D&O Insurance Market: Reforms Cause a Shifting Landscape.”

Advisen says the number of securities lawsuits filed against European companies and their share­holders in U.S. courts has mushroomed in recent years—from 15 suits in 2005 to 44 in 2008; 50 in 2010; and at an annualized rate of 52 in the first quarter of 2011.

Growth in new suit filings occurred in 2010 and first-quarter 2011 despite the falloff in credit crisis- and Madoff-related suits, which dominated in 2008 and 2009. Of all suits filed since 2005, 68 percent were filed since 2008, according to Advisen.

The days when cases were dismissed because the defen­dant was a foreign company and subject to foreign laws, Advisen says, are over. As globalization of business models goes forward, so do exposures to jurisdictions around the globe—with the U.S. court system being the leading concern.

Most large companies in Europe have some form of coverage for their directors and officers, the study finds. Many directors are refusing to serve on boards without adequate coverage in place.

Despite the growing demand, the perceived level of D&O coverage needed varies among European countries. What’s more, most mid- to small-sized public companies remain without it, Advisen says.

This compares to about a 100-percent rate of U.S. public companies with coverage. The relatively lower penetration rates in Europe among smaller public companies represent huge growth potential for providers of D&O insurance policies, Advisen observes.

As is currently the case in the U.S., D&O insurance is also vital for board members of private companies—and their European counterparts will soon demand protection as well.

The D&O market in Europe is estimated by Advisen to have been worth €1.37 billion ($2 billion) in written premium in 2008, up from €1.01 billion ($1.25 billion) in 2004.

In con­trast, Advisen estimates the U.S. D&O market to have been about €4.7 billion ($6.8 bil­lion) in written premium in 2008, down from €5.85 billion ($7.25 billion) in 2004.

During this period, the European D&O market demonstrated an outsized compound annual growth rate (CAGR) of 7.9 percent in terms of Euros, despite a soft global commercial insurance market due to overcapacity. This growth reflects an increase in the overall D&O market in Eu­rope, and not individual premiums.

The U.S. market, on the other hand, shrunk during this pe­riod due to the soft insurance market, causing premiums to fall.

Shortly after the emergence of the economic crisis, and more so in 2009, Advisen notes that D&O premiums for financial institutions in Europe spiked—because the financial services sector saw the majority of D&O claims.

For non-financial sector European companies D&O premiums have been flat, to slightly lower over the past couple of years, Advisen says. This is a result of the global soft insurance market. Premiums for the financial services sector have settled since the initial spike.

A call for stricter governance in Europe has catalyzed the creation of new codes and greater transparency. The EU’s “green paper” addresses the composition and effectiveness of the board of directors and defines the role of the chairman, board evalu­ation, remuneration considerations such as mandatory disclosure, and the need for a risk management process for all companies, Advisen says.

While common in the U.S., class action lawsuits are virtually unknown in Europe, Advises says, adding that the legal systems of European countries provide fewer avenues for shareholders to collectively pursue claims against companies and their directors and of­ficers.

With European “collective action” lawsuits, plaintiffs act in unison to bring a suit through shareholder associa­tions, representative litigation or other means, according to Advisen.

Collective action proceedings in Europe have become more common and large payments more widespread, but the land of “milk and honey,” for trial lawyers and plaintiffs is still the U.S. Its legal system makes it easier for plaintiffs to pursue cases, and contingency fees make it nearly risk-free, Advisen says.


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