The Conference Board Governance Center Blog

Nov
04
2010

Securities Class Action Filings Are Down, But Will The Trend Continue?

Securities class action claims against publicly traded companies have been trending down in recent years. Way down. At the current rate, by year end the frequency of such claims will be down roughly 15 percent in 2010 on top of a nearly 25 percent decrease in 2009, according to the Securities Class Action Filings 2010 Mid-Year Assessment by Cornerstone Research done in conjunction with the Stanford Law School Securities Class Action Clearinghouse. [Read press release and report.] This trend has been a boon for those companies that purchase directors and officers liability insurance. The reduction in claims has attracted fresh capital which, in turn, has fostered a competitive insurance landscape. It certainly is a buyer’s market.

However, the underlying question remains: Why is claims activity going down at such a rapid rate?  Has the plaintiff’s bar gone on holiday? (Unlikely.)  Has corporate America rapidly reformed itself to the point of eliminating this much malfeasance?  (We can dream.) The answer is complicated and fraught with irony.

It may be difficult to believe, but the recession actually bears a silver lining in that it has been a major influence on the decrease in claims activity. Because, when everyone is suffering the ill-effects of a recession and a depressed stock market, it becomes harder for plaintiffs to locate and isolate legitimate malfeasance within individual companies.

Company stock price down? Get in line. Very few companies can boast that their stock price is up during a recession. Revenues off?  Whose aren’t? Corporate layoffs and cutbacks are key and obvious indications that many companies are looking for ways to compensate for decreased revenues during a recession. Too much inventory? Come write it off with the rest of us and then we can commiserate with each other on some business talk show or blog du jour. In addition, defendants tend to appear a bit more sympathetic when the suffering is widespread. Inversely, plaintiffs appear more like nasty bullies than white knight crusaders during times of universal suffering like these.

But there’s more. This particular cycle of declining claim activity is more sustained than usual. Why? Because this recession shouldn’t be confused with the bursting of the tech bubble several years ago or some other similar “corrective” cyclical event of the past. This recession is far deeper, fueled by systemic over-leveraging across the country on a massive scale and the tanking of the real estate market — a fundamentally organic national asset.  Therefore, this particular episode of reduced claim activity has had a better opportunity to develop over time.

Will this trend continue? My crystal ball has gone dark on me, and there is no way to predict exactly what will happen. We do know that as the economy improves, claims will typically be driven by IPOs, and mergers and acquisitions, while stock drops may result from corporate surprises.  Therefore, based on these past trends, as the economy continues on the mend and stock prices and valuations start to bounce back up, D&O claims may begin to increase again along with D&O pricing, eventually.

You may ask: At this point in the cycle, what should I be doing with my D&O insurance program?  You may want to leave it alone if it’s working for you. If you have a strong relationship with your insurance carrier, and are confident that it has the wherewithal to handle any claims that may arise, then consider doing nothing. When claims and premiums do move up, you’ll be glad you’re with an insurance carrier with whom you have a relationship.

On the other hand, if you sincerely believe that claim activity and the litigious nature of the plaintiff’s bar have now permanently quieted, you might consider shopping your directors and officers liability insurance program around. But be warned: History dictates that none of us should probably hold on to that belief too tightly.

About the Guest Blogger:

Anthony Galban, Senior Vice President, Chubb Group

Anthony Galban, Senior Vice President, Chubb Group

Tony Galban is senior vice president and underwriting manager responsible for the directors and officers (D&O) liability business for Chubb Specialty Insurance (CSI). In the past, he has worked in various D&O underwriting capacities for Executive Risk, which was acquired by Chubb in 1999. Previously, he worked for nine years at Aetna Life & Casualty as both a casualty underwriter and as a senior product specialist for general liability coverages.

He is a graduate of Wesleyan University in Middletown, Conn.



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