D&O Suits Down, But Costs Up

Although securities class-action filings fell 38 percent in 2006, the costs of settling such actions soared to new heights, according to a recent report.

The total value of settled cases in 2006–excluding settlements totaling $7.1 billion relating to the Enron collapse–grew to $10.6 billion, more than 300 percent above the 2005 level of $3.5 billion, according to Washington-based Cornerstone Research.

Back in January, Cornerstone reported that securities fraud class-action filings dipped to 110 last year–down from 178 filings in 2005–and nearly 43 percent lower than the 10-year historical average of 193.

Stanford Law School Professor Joseph Grundfest predicts that settlements are poised to tumble, too.

“With the largest part of WorldCom and Enron settlements now wrapped up, and fewer huge pieces of litigation in the pipeline…aggregate settlement amounts have only one way to move–and that's down,” he said in a statement.

Putting aggregate figures aside, however, Steve Shappell, managing director of Aon Financial Service Group's claim practice in Denver, is less optimistic about individual situations.

“If you're one of the unlucky companies to draw the attention of the plaintiffs' bar and regulators, it's very painful,” he said, predicting they will face shareholder class actions, derivative actions, opt-out suits from big institutional investors, and 401(k) litigation by their own employees.

Noting that one goal of the Private Securities Litigation Reform Act of 1995 was to put institutional investors in lead-plaintiff roles, he said this has had two important consequences for defendants.

First, big settlements are now huge.

o In 1995, the average for the top 15 settlements was $70 million.

o In 2006, it was $208 million.

o Six of the 10 largest settlements ever came in 2006, and all those were led by institutional investors.

“And when it rains, it pours,” he said, noting that although Time Warner paid $2.4 billion to settle a securities class action, 100 institutions opted out of the settlement. Ohio Attorney General Marc Dann announced a $144 million opt-out settlement with five Ohio pension funds in early March.

In spite of severe claims, D&O insurance prices are falling.

o Although Aon's price index ticked up slightly in the fourth quarter of 2006, prices dropped almost 9 percent for the year–and 40 percent below a historic high in 2003.

o New York-based Advisen said overall premiums dropped 5.5 percent in fourth-quarter 2006, or nearly 30 percent since fourth-quarter 2003.

Coverage is broadening, as well. “We're already seeing traditional D&O policies now with nonrescindability features,” said Joseph Monteleone, a partner for Tressler, Soderstrom, Maloney & Priess in New York. He noted that policyholders are lobbying for such features to mimic coverage expansions they've seen on Side-A policies that have become popular.