Professional Liability and Securities-Related Claims Trends

David Williams and Eleni Maroudas | September 14, 2009

• Announcing the CI Legal Expert Panel
• Another Twist to Consider—The Allstate Case
• Competition is Fierce—Restrictive Covenants in the Shafron Case
• Internet Use (To Catch Abuse)
• Facebook Litigation Grows
• Proof—Roles of Adjusters and Lawyers in Fidelity Recovery
• Best Practices for Successful Subrogation Recoveries
• State of Securities Class Actions
• Professional Liability and Securities-Related Claims Trends
• Misguided Critique of Covert Surveillance
• Employee Termination—A Risk You Can Manage
• Using Data Analytics to Maximize Company Performance
• Give It Up—Vehicle Fires & Frauds
• Overview of Detection & Investigation Techniques

Back to main page

The credit crisis and global recession is just the most recent systemic event to affect professional liability.

U.S. Trends

Credible industry studies, such as NERA Consulting, Cornerstone Research, Kevin La Croix’s D&O Diary and Advisen, track securities litigation trends. With the exception of Advisen, each has recently released its respective mid-year 2009 assessment of securities litigation trends. These studies found:

• There is a consensus between the D&O Diary and Cornerstone that filings are slowing.
• However, NERA found that: “In the first half of 2008 filings have come in at a similar rate [compared to 2008], with 127 filed by June 30, on pace for over 250 for the full year.

According to the Cornerstone report, the overall rate of U.S. securities litigation has declined 22.3% from the filing levels of 2008. Yet, other credible sources, such as Kevin La Croix have opined whether or not the “decline in filings in the second quarter [is a result of the fact that] plaintiffs’ lawyers found themselves in a log jam, due to the onslaught of Madoff-related litigation and the fact that many of the previously filed credit crisis cases had reached critical procedural stages?”

La Croix’s criticism is based on the fact that these studies are mid-year assessments and are based on a six-month period. He suggests that it may be prudent to wait until year-end to assess whether the recent data is an aberration or reflects an emerging trend.

Systemic Nature of D&O Liability

The Professional Liability litigation studies attempt to call out long-term trends, but the litigation landscape more accurately could be characterized as a series of systemic events.

Bar-graphs quantifying litigation are crowded with footnotes delineating systemic events from IPO Laddering, Mutual Fund Timing and Options-Backdating to the newer batch of Credit Crisis and Ponzi Schemes. In each of these events the claims costs soar.

While hard to predict, systemic events tend to focus on an industry. As a recent example, homebuilders had many years with very little litigation, only to be routed during the U.S. housing bubble collapse and credit crisis.  The joint ventures and land option accounting, commonly used by homebuilders for years, were suddenly exposed and called into question, not unlike the assumptions and lending practices of mortgage intermediaries.

Canadian Trends

On the Canadian side of the border, the Canadian securities class action landscape wasdramatically altered by the introduction of a limited regime of statutory civil liability for secondary market disclosure.

Ontario's Bill 198, was finally proclaimed in force as of December 31, 2005. The amendments are now law and introduce the statutory civil liability scheme, which eliminates impediments that restrict common law actions based on deficient secondary market disclosure, but requires potential plaintiffs to seek leave of the court to proceed with such litigation and includes other limitations and defences. A number of other provinces subsequently introduced similar legislation.

In an effort to reflect the new Canadian litigation changes, NERA published Trends in Canadian Securities Class Actions: 1997-2008 at the beginning of 2009. According to NERA, there are at least 14 Canadian class actions in progress under this legislation, with Canadian companies in a record nine new securities class actions in 2008, which are based on the “now fertile environment for securities class actions litigation in Canada.”  Not surprisingly, a Canadian plaintiffs' bar, focused on pursuing securities-related class actions, has also emerged.

While the recent trend toward increased securities class action litigation in Canada, as a result of legislative changes, is obvious, there has not yet been enough claims experience to fully assess the ultimate costs of these claims.  What is clear is that defending allegations during the leave process can be time consuming and costly. Recent judicial decisions have left it uncertain what level of discovery in the form of affidavits and document production will be allowed at the leave stage.

Impact on Professional Liability Underwriting

With an erratic and depressed economy, the great debate in the insurance industry on whether the market will go hard or soft, continues. Only time will tell if the financial results of insurance carriers will introduce a hard market or if new capacity will keep the market competitive.

Currently, customer profiles determine what renewal environment they face. Financial institutions face price and capacity challenges. Commercial customers fare much better depending on their industry and individual financial strength and performance.

Underwriters, of course, must assess multiple issues, but in the current economic and litigation environment two concerns rise to the top of the list:

1. assessing the weakened financial strength of companies against the backdrop of a global credit crisis and recession; and
2. grappling with systemic events. 

Economic climate creates increased risk

Unfortunately, increased financial stress on a company increases the potential liabilities of directors and officers. Heightened stakeholder scrutiny means that errors are more likely to be revealed or decisions second-guessed, customers may be unable or less willing to make purchases, banks may be reluctant to renew lines of credit, employees could be terminated and share prices may fall. All of these situations heighten the potential liability of directors and officers.

Systemic Events

The only thing predictable about systemic events is that they will arrive, as if on queue, to interrupt any brief respite from apparent declines in litigation. Systemic events can ensnare any company in any sector at any time.

Brokers, clients and insurers need to be sensitive to the current data regarding claims and emerging trends. Gradual adjustments to insurance programs could avoid the development of a dramatic hard market environment.

David Williams is senior vice president of Specialty Insurance for Chubb Insurance Company of Canada. Eleni Maroudas is corporate counsel for Chubb Insurance Company of Canada.