It was a great honor to moderate a Professional Liability Underwriting Society D&O Symposium panel on the ability of Contingent Liability (CL) insurance to improve outcomes in securities class actions (SCA).
Randy Hein, President of Berkley Transactional (Berkley Professional Liability), pioneer of CL for SCAs; Kara Altenbaumer-Price, executive risk broker at McGriff; Paul Bessette, co-chair of King & Spalding‘s securities litigation group; and Elizabeth Neumann, AXIS‘s head of professional liability claims, discussed how SCA outcomes are worsening for defendants and how CL for SCAs can help improve them.
Until 10-15 years ago, defendants often defended an SCA that survived a motion to dismiss (MTD) through class certification and summary judgment. Now, most SCAs settle soon after an unsuccessful MTD—a practice that inflates settlement amounts because defendants lack the leverage that litigation on the merits creates. As a result, the settlement value of every SCA has become simple to calculate: it is the lowest amount the plaintiffs will take. That amount continues to escalate as a percentage of plaintiff-style damages, especially in SCAs against companies with a market capitalization under $2 billion—a cohort perennially comprising more than 50% of all SCAs.
This lack of litigation owes to a variety of factors, including two important financial considerations:
- Due to escalating defense costs, defendants often can’t defend an SCA past the MTD through class certification or summary judgment, much less trial, while still preserving sufficient D&O proceeds to settle later–a problem especially acute in the large cohort of sub-$2 billion market cap SCAs; and
- Defendants fear an improbable but non-zero risk of a potentially catastrophic financial loss.
The insurance industry has a long history of resolving such large but improbable financial risks. In the right situations, Transactional Risk underwriters may be able to provide enough capacity to remove the risk of (improbable) catastrophic financial loss, enabling defendants the freedom to defend themselves in such litigation. This protection would better promote more vigorous litigation and better align settlement amounts with the merits.
Randy Hein and I wrote a paper for PLUS Journal on CL for SCAs, which we also submitted for the D&O Symposium: A Free-Market Solution to Meritless Securities Litigation (at p. 23).