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Lawsuits are flying around these days, and the price of insurance premiums is rising with them, especially for directors and officers, or D&O insurance, reports say.
Aon, which serves as an insurance broker to Fortune 500 companies, says premiums for D&O insurance soared 29% on average in the third quarter compared to the prior year, according to the Dow Jones News Service.
Insurers have been speaking out about increased claims in casualty insurance due to more lawsuits, including securities class action lawsuits, and more substantial damage awards.
A securities class action, or derivative lawsuit, accuses the directors and officers of failing in their fiduciary responsibility.
In 2018, nearly 10% of S&P 500 companies were targeted by a derivative lawsuit, according to research published by Chubb.
“You can expect to see a securities class action filed whenever there is an event followed by a drop in stock price,” said Scott Meyer, division president of North America financial lines at Chubb, in a 2019 Chubb report.
“But now, even events that didn’t move the stock price are triggering securities class actions against the board,” Meyer wrote in the report.
Merger objection lawsuits are another legal action driving up the price of insurance. According to Chubb, lawsuits challenged 85% of mergers in 2018.
The more expensive premiums may lead companies to opt for higher deductibles or lower caps. That could have a cascading effect leading independent directors to refuse to join boards that do not have quality insurance.
There is a court case that could offer relief from the spiking D&O prices.
The Delaware Supreme Court will soon rule on the case of an appeal involving Blue Apron, Roku, and Stitch Fix, according to CNBC. If successful, the companies would be able to include or to amend their bylaws to eliminate duplicative state court litigation.
Shareholders would have to file lawsuits in federal court. That should help bring down the prices of D&O insurance for IPO companies.
