Growing investor class actions add to D&O market pressures

Two investor class actions launched in the UK this month have added to international pressure driving up D&O rates. It emerged in early February that Metro Bank investors are working with litigation specialists Stewarts Law, after an accounting error wiped almost £800m off the UK bank’s stock market value in January 2019. Litigation funder Innsworth, previously jointly owned by Bentham, recently confirmed that it is looking to bring a $400m claim on behalf of institutional investors in UK-based oil service company Petrofac, following a bribery scandal. Bentham is already linked to investor actions in the UK against telecoms group BT and retailer Tesco. Stewarts Law was behind investor class action litigation against RBS related to a 2008 rights issue, although investors reached a settlement with the UK bank in 2017. Investor class actions are spreading globally, according to Eleni Petros, senior management liability specialist at Marsh. “The next 12 to 18 months could reach a turning point. There is growing enthusiasm for investors to pursue collective actions and the litigation funding market has grown. We have seen an explosion of securities class actions in Australia due to litigation funding and we now see collective redress in Europe, including the UK and the Netherlands,” she said. “With a global increase in class actions, clients look to increase D&O limits, especially where there is a US exposure. We have seen a big increase in US securities class action filings, to record levels,” said Ms Petros. Collective redress for investors is on show in several European markets. In January, Bentham joined law firms Quinn Emanuel and Njord Law to bring a shareholder lawsuit against Danske Bank over its recent money laundering scandal. Last year, a Dutch court approved a $1.5bn settlement involving Fortis after investors sought damages for losses related to the financial crisis. Investors are also suing Volkswagen in the Dutch courts over its 2015 emissions scandal. In Germany, investors are using the Capital Investors Model Proceedings Act (KapMuG) to consolidate multiple-party claims. KapMuG was recently used to bring investor litigation against VW for its emissions scandal. The UK has seen an increase in the number of investor class actions, although numbers are still limited, according to Graham Ludlam, a partner at DAC Beachcroft. “This has been driven by litigation funders seeking good claims as an investment opportunity, including US plaintiff firms that are unable to practise in the UK but therefore sit behind a UK law firm, as funders controlling the litigation. However, while we are seeing more, the overall number is still very low,” he said. While securities class actions appear to be on the rise outside the US, Europe is far from the aggressively litigious environment seen on the other side of the Atlantic. “There has been an increase in investor collective actions in UK and Europe, but this is still a developing phenomenon, and it may be too soon to call it a trend,” believes Yoel Brightman, underwriting manager for international financial lines management liability at AXA XL. “One element of these collective actions that differentiates them from US-style class actions is that they operate on an ‘opt-in’ basis, meaning that the class is often smaller than would typically be seen in the US,” he said. There are some significant differences between the securities claims in the US and the UK, explained Mr Ludlam. The procedural mechanism for bringing a claim is very different, and this very much limits the financial impact on companies and directors in the UK, he said. US securities class actions reached a new peak last year, recording the highest number of filings since the 2000 dotcom crash, according to analysis by NERA Economic Consulting. However, NERA also noted a 25% drop in actions against foreign firms. At the same time, regulatory and investigatory bodies in the US and UK have broad global scope and have significantly ratcheted up their operations. The costs of representing multinational companies in such actions totals many tens of million dollars, noted Mr Brightman. The growth in investor class actions and regulatory investigations has caused significant hardening of the D&O market, especially for companies exposed to the US and Australia. In some cases, rates have increased 200%, according to Marsh. “The D&O market has hardened significantly over the past six months and a number of underwriters have withdrawn from the market, reducing capacity. Rates have increased and retentions have doubled, while D&O terms have become more onerous for insureds in some cases,” said Ms Petros. As a result of previous soft market conditions, self-insured D&O retentions have been eroded to the point that defence costs, even in cases where claims are dismissed, often fall upon the D&O programme, according to Mr Brightman. “At the same time, the increase in legal fees means that cases that might previously have been expected to have been contained within self-retention levels are busting through to the D&O programme. This leads underwriters and brokers to question both pricing and retention levels. It affects the overall health of the D&O market and is something clients must be aware of too,” he said.

Growing investor class actions add to D&O market pressures

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