Last week, a global insurance company identified what it believes are the risk trends in 2020 that “have significant implications” to directors and officers (D&Os). The firm’s perspective provides a window into the types of trends insurers and underwriters are watching.
1. “Bad news” events resulting in more litigation
The insurer notes that there has been a rise in nonfinancial-based claims against D&Os stemming from what the firm calls “bad news” events, such as cybersecurity attacks, toxic culture (i.e., #MeToo movement), product liability, corruption and environmental disasters. The insurer warns that “bad news” events can prompt a regulatory investigation or cause share prices to fall, which the report states can “often result in significant securities or derivative claims. . . .” The report cites results from another study that found that “[o]f the top 100 US securities fraud settlements, 59% are event-driven.” In addition, the firm “has seen a number of [cyber-related] securities class actions, derivative actions and regulatory investigations and fines, including from the EU’s General Data Protection Regulation (GDPR), in the last year, and expects an acceleration in 2020.
2. Rise in Climate-related legal claims
Among 28 countries, 75% of climate-related cases brought to date were in the United States alone. The firm anticipates that the failure to disclose climate change risks may drive claims in upcoming years. Moreover, a company’s lack of responsiveness to overall environmental, social and governance (ESG) issues, including ethical topics, can cause brand values to plummet. The insurer warns that, when gauging a company’s reputation, underwriters of D&O insurance will consider the nature and tone of comments made on social media relating to the company.
3. Rise in securities class actions
Securities class actions in the United States “ha[ve] been at record highs in the recent years with over 400 filings in both 2017 and 2018, almost double the average number of the preceding two decades.” The global insurer believes that this trend is impacting both domestic companies and foreign companies that have listed securities in the United States.
The insurer co-developed a global risk map that takes into account the availability of third-party litigation funding, which the firm believes is a “strong factor” in determining the prevalence of class-action lawsuits. While the highest activities have been seen in countries like the United States, Canada and Australia, the global insurer has observed “securities class action mechanisms are developing and strengthening around the world.” Moreover, the insurer finds that in recent years there has been a notable increase in the Netherlands, Germany, England and Wales. This could be a noteworthy development given the global profile of many S&P 500 companies.
The report expresses concern about companies’ responses to stakeholder pressures, including from investors, calling for speedier disclosures. Sometimes this results in companies and directors using social media to respond. The insurance firm believes these types of time pressures “cause a strain on accuracy and accountability.”
4. Anticipated bankruptcies and political “clouds”
The insurer predicts there will be an increase in bankruptcies, which may result in an increase in D&O claims. Moreover, “political challenges” events such as political elections, Brexit and trade wars could have a major impact on a board’s risk management. The insurer observes that litigation claims could result from inadequate risk management of topics, such as currency strategies, M&A strategies, as well as supply chain and sourcing decision- making based on changes in tariffs.
5. Increased litigation funding fueled by financial products yielding high investment returns
The insurer finds there is a strong nexus between the prevalence of class-action suits and the plaintiffs’ access to third-party funding. The insurer cites a 2016 study that indicates that the average return on investment for these products, which use the invested money to fund litigation costs, was approximately 36% annually. Given the strong returns already achieved by investment class products that fund litigation, the firm believes investors’ cravings for these products will continue. While the United States has accounted for 40% of this market, the firm sees the availability of these investment products spreading to or growing in other parts of the world.