D&O - Notifications and loss trends

Securities class action litigation against companies and their officers is increasingly becoming a global issue.
  • Increased regulator and prosecutor resources feed into activist shareholder lawsuits
  • Top cause of D&O claims is non-compliance with laws and regulations, followed by negligence and maladministration
  • Actions being dismissed or resolved more slowly, meaning lengthier litigation, and higher settlement expectations
  • Skyrocketing legal defense costs will only continue with more complex cases and litigation funders
  • Creative plaintiff bars and funding firms increasingly brazen; actively seeking new cases to exploit

Securities class action litigation against companies and their officers is increasingly becoming a global issue due to the influence of more third-party funders seeking jurisdictions in which to operate.

A study by Marsh1 found that UK professional and management liability insurance notifications increased from between 200 to 300 in the years 2005 to 2007 to a peak of 1,685 in 2012, a figure that has since averaged at 1,300.

The biggest exposures, and source of D&O claims, are in the US and Australia. Germany is another market where executive liability has increased. Twenty years ago there was little demand, but a changing regulatory and legal environment has seen an increase in executive exposure and D&O claims.

“Germany, together with the US and Australia, is now the region with the most D&O claims in the world,” says Martin Zschech, Regional Head Financial Lines Central & Eastern Europe, AGCS.

In mature markets, D&O claims frequencies gradually have increased over time, albeit with a notable spike around the global financial crisis. US filings and enforcement actions – a proxy for claims frequency in the US – doubled to over 2,000 at their 2011 peak from 1,000 in 2006, according to Advisen2. Filings have since settled at around 1,500 in 2013, 2014 and 2015.

The increase in claims has been particularly pronounced in Germany – 20 years ago AGCS would have seen 40 to 50 executive liability claims in Germany annually, now there are around 120, according to Stephan Kammertoens,
Global Head of Financial Lines Claims, AGCS.

The increase reflects Germany’s changing legal environment, in particular the rise of “internal liability” cases which follow a regulatory investigation or a criminal prosecution where the company sues individual board directors, as with ThyssenKrupp. Around 80% of German D&O claims seen annually by AGCS are for such cases, while the remainder are related to insolvency or other criminal prosecutions.

As an example, the supervisory board of Siemens sued its management board after it reached a $1.6bn settlement with US and German prosecutors in 2008.The
company sought to recover damages from 11 former top managers and supervisory board members for breaches of organizational and supervisory duties related to bribery and corruption allegations3.

“German public prosecutors are well resourced, with significant expertise, and are prepared to go after directors of German and European companies,” says Kammertoens.

While frequency of claims has increased in several key markets, severity also has risen sharply due to rising legal costs, increasing complexity of large claims, and expanding regulatory investigations and cross-border actions.

A 2015 AJ Gallagher study of large US D&O claims showed that severity of the 50 largest claims doubled over an eight year period, from under $100m per claim in 2006 to $200m in 2014 and 20154.

The severity of D&O claims has increased as claims have become complex and exposures large, according to Kammertoens. The net result is larger, costlier, more numerous and increasingly more complex claims to litigate.

Kammertoens comments that the complexity of claims is reflected in higher legal and defense costs, which can easily absorb one quarter to one third of the insured sum.

According to law firm Clyde & Co., there is also a general tendency towards actions being dismissed or settled more slowly, with the consequences trending to being lengthier litigation, increased defense costs and higher settlement expectations among plaintiffs who are investing more time and expense to build legal cases. This trend isn’t solely a US one, but is noted in the UK, Canada, Australia, France, Spain and Hong Kong.

In the past six years defense costs have almost doubled for large D&O claims, explains Paul Schiavone, Regional Head Financial Lines North America, AGCS. “This is a critical issue for executive liability insurers,” he says.

The average securities class action case takes between three and six years to complete, while legal defense costs average around $10m, rising to $100m for the largest cases, according to Schiavone.

High levels of complexity translates to significant amounts of time and resources to resolve claims, requiring specialist lawyers and judges. Regulatory defense costs are also an issue, especially when investigations span many jurisdictions.

“Large cases are carried out in the limelight with a high degree of reputational risk. So companies will fight them because the stakes are often just too high,” Schiavone says.
Recent years have seen some large corporate liability cases with settlements that run well into the billions. In such cases, defense costs and civil litigation can result in D&O claims valued in the hundreds of millions of dollars.

One trend of the past decade has seen companies targeted by regulators and legal action outside their home territories. For example, Volkswagen faces regulatory investigations in both the US and Europe, following emissions test cheating accusations.

“Such large cases are challenging to investigate and defend and we see this in the largest D&O claims, which are becoming bigger and more expensive,” says Schiavone.

These cases aren’t just in sectors like finance, technology or biotech, he explains. “One of the largest claims in Europe involved the collapse of the Italian dairy firm
Parmalat while one of the largest settlements ever was for a consumer group, Cendant Corporation”.

In Germany, a number of large commercial executive liability claims have exceeded €1bn, although they often settle at much lower amounts. Large D&O claims of $100m or more include Daimler-Chrysler and Siemens. “Most companies buy large limits, but there is the potential to be caught short by very big claims,” says Schiavone.


1. Professional and Management Liability Insurance Claims: Common Pitfalls for Unwary Policyholders, Marsh
2. D&O Claims Trends, Q2 2015, Advisen
3. Siemens settles last bribery suit against former executives, Reuters
4. Market Conditions, Public Company Directors & Officers Liability Insurance, Arthur J Gallagher

Sign up to e-update
Allianz operates as an international insurer on almost every continent. Find Allianz in your own country/region.
With the Allianz network AGCS provides services in over 200 countries and territories.