Proponents of the 2009 Senate bill state that the Supreme Court in the Stoneridge ruling unfairly limits shareholders’ rights. Their view is that secondary actors or aiders and abettors of alleged securities fraud ought to be subject to a private action by investors. In this scenario, third parties or secondary actors would be named as co-defendants in securities class- action litigation.
Opponents of the bill state that frivolous lawsuits will be filed by plaintiffs’ attorneys, potentially resulting in higher D&O insurance premiums to cover increasing defense costs and settlement values. While the observation that it will now be easier for plaintiffs to sue is correct, it is not necessarily true that D&O insurance premiums will increase—not because they won’t (because they will be likely to if this kind of coverage is provided), but because there is the very real possibility that this kind of exposure will not be insurable.
D&O insurance policies generally only cover securities claims brought by the corporation’s shareholders, not those brought by shareholders of the corporation’s customers or suppliers. In order for a D&O underwriter to calculate and analyze risk, one question now likely to be asked is, “How frequently will the plaintiffs’ bar file securities litigation including third parties or secondary actors as co-defendants in a securities class-action lawsuit?” D&O pricing is based upon sound actuarial analysis that factors in both the exposure and experience-loss costs. Since the third-party secondary actor securities litigation is an expansion of the securities laws, there is scant historical experience to conduct a sound actuarial-liability analysis.
Placing directors and officers into the line of fire of plaintiffs’ attorneys for the alleged fraudulent practices of its publicly traded customers and vendors without the requirement of reliance adds a level of complexity to the D&O underwriting process. As a result, if Senate Bill 1551 becomes law, the potential additional exposures and lack of credible actuarial experience data will likely cause significant increases in D&O premiums for all customers and will likely make it more difficult for certain types of companies to even acquire or maintain D&O insurance to protect their directors and officers. It is critical to note that Congress is now actively pursuing a path to increase the liability of directors and officers.
Christopher Duca is president and CEO of Navigators Management Company (NMC) and president of Navigators Pro. He can be reached at cduca@navg.com.
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