Case delays could add to D&O settlements in US

A backlog of cases filed against directors and officers in the US that worsened during the Covid-19 pandemic is clearing, but there are concerns that the delays could add to the size of some settlements.

D&O cases weren’t moving swiftly through the courts before the pandemic, experts point out, but the closure of courts and postponements of mediation and other proceedings made the pileup worse.

“Generally speaking, the longer a case is unresolved, the more expensive it is,” said Phil Norton, senior managing director of the management liability practice at Arthur J Gallagher & Co. “The longer two sides are in disagreement, the greater the volatility.”

D&O cases in normal times tend to be lengthy and defence costs can be expensive, said Dan A Bailey, a member of the law firm Bailey Cavalieri. And, the more time and money plaintiffs’ attorneys invest in a case, the more they generally seek in a settlement, he noted.

Pent up demand
Cases that were stalled during the pandemic have created a “pent-up demand” for claims to be processed, said Tom Ripp, global head of specialty claims at Zurich Insurance. And, he noted, “everything points to big surge in D&O legal proceedings in the coming years”, with companies that are alleged to have been unprepared for the impact of the pandemic becoming the focus of litigation.

“Other actions may be brought for failure to disclose – for example, allegations that a company did not fully disclose how Covid was impacting or would impact their operations,” said Mr Ripp.

“The bottom line is, yes, claims frequency for D&O will take an uptick as we get further out of the pandemic,” said Mr Bailey. “Are we going to go back to where we were a year or two before the pandemic? That jury is still out.”

Research bears out the notion that the longer cases take to settle, the more expensive they become. The median settlement in securities class actions from 2016 through 2020 amounted to $2.6m when reached before a motion to dismiss was filed, according to Cornerstone Research’s Securities Class Action Settlements – 2020 Review and Analysis. That amount rose to $13.8m when a case settled after a class was certified but before a ruling was reached, and stood at $44.3m for settlements reached after a ruling on a motion for summary judgment.

Cases are moving through the courts now, said Sarah Downey, financial services claims leader at Lockton Cos, and the backlog seems to have cleared. “Courts were closed at the beginning of the pandemic,” she noted, but that didn’t stop mediations and depositions from being held virtually and some are now taking place face to face.

“The only delays we have seen are in jury trials because, obviously, those involve large groups of people at the same place,” said Ms Downey.

D&O delays
D&O cases began to pile up in 2017, when there was a rush of complex federal securities class action filings, said Mr Norton, reaching about 540 by the beginning of 2020.

With courts closed during the pandemic, the number was little changed by the end of 2020 as few cases were resolved or filed. “It seems to be treading water right now,” Mr Norton said of the case count. “It’s one thing that cases are resolving more slowly in the pandemic, but they were also being brought more slowly.”

There was a significant drop in new securities class actions – the most common type of D&O case – filed during the pandemic, Mr Bailey said. The number of cases fell by 20% from 402 in 2019 to 322 in 2020, according to the Stanford Law School’s Securities Class Action Clearinghouse.

Case delays have not caused operating problems for broker PL Risk Advisors, but could make for tricky decisions by insurers with regard to reserves, said Javier Gonzalez, executive vice-president of sales for the broker. “They have to have an idea of what this is going to cost, short and long term.

“The way these claims are shaking out is less and less in favour of the insurance companies,” continued Mr Gonzalez, and they often choose to settle rather than risk an expensive judgment. “They are very cautious as to what they believe the success rate could be for a particular claim” when considering whether to settle, he said of insurers.

Prolonged hard market
Uncertainty about cases still in the pipeline could help prolong firm conditions in the D&O market, said Mr Norton. “Carriers are not going to want to be too competitive if they have a big unknown on these cases.”

If there is a string of large settlements at once, “that will obviously have a chilling factor” and could influence insurers to rethink their exposure, Mr Norton noted. “If some of these cases in the backlog become mega cases” of $100m or more, that would rattle the excess market, he said.

Rising rates and an increase in writings have helped insurers build surplus against large losses, said Mr Gonzalez. Any worry about the possibility of significant claims from cases in the pipeline is likely tempered by “the adjustments they have been able to make in the past few years to their books of business”, he said of insurers.

The D&O market was hardening before the Covid-19 crisis, said Ms Downey. “And that definitely continued through the beginning of the pandemic.”

New insurer entrants have eased conditions a bit in a firm D&O market, she said, but buyers are finding insurers still reluctant to offer high limits. “We’re not seeing those $10m chunks of limits” that were previously available, Ms Downey explained. “We’re seeing $5m or $2.5m from a single carrier. Retentions and deductibles have definitely gone up.”

Outside help
Fallout from the pandemic has caused many directors to reconsider how they manage professional liability risk, research shows.

The Global Network of Director Institutes questioned more than 1,900 directors for its Global Network of Director Institutes 2020-2021 Survey Report and found that a majority are looking for outside help to better prepare for future crises.

“Given the unexpected nature of the crisis and its resulting impact on stakeholders, it is no surprise that directors and their boards expect to see a greater role for outside experts in risk scenario planning and decision-making (69%),” the report notes.

But the report also concludes that it would be a mistake for directors to concentrate solely on the pandemic’s impact. “Boards should learn important lessons from the pandemic crisis,” it states, “but they should not, however, fixate on the specific challenges of the last crisis. Instead, they must work with their management teams to ensure that their companies don’t ‘sleepwalk’ into the next major, global systemic risk, and look at ways to future-proof risk management programmes and reporting.”

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