Settlements May Depend More on Personal Contributions from Sued Officers and Directors, Reports Recent Article from The National Law Journal.
According to Amanda Bronstad’s April 17, 2009 article, “As D&O Coverage Falls, Plaintiffs Lawyers Fees at Risk,” published in The National Law Journal and available for reading at LAW.COM, plaintiff shareholder actions—mainly securities class action or derivative suits—may get harder to settle with the shrinking nature of D&O insurance available for purchase or use.
Premium rates for D&O insurance rose by 3% in the fourth quarter of 2008 as compared to the same quarter for 2007, an unprecedented increase after declining rates for more than 20 previous quarters. More and more, corporate boards are purchasing “Side A” D&O insurance, which provides coverage to directors and officers only if the employer (usually a corporation) is unwilling to indemnify its covered employees or is insolvent, such that no contractual indemnification rights can be triggered to cover the costs of defense (which usually will be substantial in amount).
The flip side to the increased rates and resort to “Side A” insurance is that it may become much more difficult to settle plaintiff shareholder cases. If a corporation remains in business and only has “Side A” insurance, this means the individual defendants will have to pay their own costs, depleting resources available for future settlements and also meaning that plaintiffs’ counsel does not have D&O insurance to tap into unless the company goes insolvent. (BLOG OBSERVATION—Co-contributor Mike does practice in the federal securities defense area, knowing from real life experience that D&O insurance usually funds a large portion of settlements in shareholder cases.)
Even for companies purchasing D&O insurance, carriers have indicated that more exclusions will be inserted into policies. Beyond that, the substantial legal fees charged by specialized defense firms usually “burns off” the coverage limits such that less is available for settlement, raising the specter that directors or officers may have to dip into their personal assets in order to compromise shareholder actions.
The article ends by noting that many plaintiffs’ attorneys are monitoring their expenditures closely and putting a premium on prosecuting the cases efficiently given the state of the economy and the D&O insurance crisis.