Demystifying D&O Liability & Insurance:
Numbers, Basics, & Trends
Leslie A. Lamb
Director of Global Risk Management
Cisco Systems, Inc.
Edward M. Joyce
Partner
Jones Day
Carol A.N. Zacharias
Deputy General Counsel
ACE North America
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Page 1
The views expressed by the speakers are not those of
the speaker’s employer, firm, clients, or any other
organization.
The opinions expressed do not constitute legal or risk
management advice.
The views discussed are for educational purposes only,
and provided only for use during this session.
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Agenda
•
•
•
•
The Numbers
The Basics of D&O Coverage
International Coverage
Current Trends in D&O Liability
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The Numbers: SCA Filings
Number of Securities Class Action Filings, 1997-2013
(Average: 191)
300
242
250
200
174
209 216
228
224
180
192
223
182
150
177
188
167 176
152 166
120
100
50
0
Cornerstone Research, “Securities Class Action Filings: 2013 Year in Review”, www.cornerstone.com.
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The Numbers: SCA Filings
Number of Companies Listed on U.S. Exchanges
1997-2013
• Listings
• 1997: Over 8000
• 2013: Just over 4,000
• 46% decline
• Declined 6% annually 1998-2004
• Declined 3% annual decline thereafter
Cornerstone Research, “Securities Class Action Filings: 2013 Year in Review”, www.cornerstone.com.
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The Numbers: SCA Filings
Industry Sector
Financial
Consumer/Non-Cyclical
Industrial
Technology
Consumer Cyclical
Communications
Energy
Basic Materials
Utilities
Unknown/Unclassified
Total
Avg. Filings
1997-2012
37
45
17
25
21
31
7
4
3
190
2011
Filings
25
45
25
21
21
24
18
5
4
188
2012
Filings
15
49
14
12
15
19
14
9
3
2
152
2013
Filings
18
45
16
20
19
23
17
5
1
2
166
Cornerstone Research, “Securities Class Action Filings: 2013 Year in Review”, www.cornerstone.com.
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The Numbers: SCA Filings
Filings By Statute (Percentage of Total Filings)
Statute
2009
2010
2011
2012
2013
Sec. 10(b)5
Claims
69%
66%
71%
85%
84%
Sec. 11
Claims
Sec. 12(2)
Claims
None of
above
claimed
23%
15%
11%
10%
9%
25%
10%
9%
9%
7%
1%
23%
23%
9%
11%
Percentages do not add to 100% as complaints may include multiple statutory allegations
Cornerstone Research, “Securities Class Action Filings: 2013 Year in Review”, ww.cornerstone.com
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The Numbers: SCA Filings
Filings by Allegations (Percentage of Total Filings1)
Allegations
2009 2010 2011 2012 2013
Misrepresentations in financials (Halliburton)
89%
93%
94%
95%
97%
False forward looking statements
Insider trading
51%
45%
56%
62%
54%
14%
16%
12%
17%
17%
GAAP violations2
37%
26%
37%
23%
24%
Announced Restatements3
10%
7%
11%
11%
11%
Internal Control Weaknesses4
Announced Internal Control Weaknesses5
14%
23%
24%
20%
20%
4%
3%
6%
8%
8%
1Percentages
do not add up to 100% as complaints may include multiple allegations
represent GAAP allegations even if GAAP not expressly referenced
3First identified complaint alleges GAAP violation even if GAAP not expressly referenced, and refers to restatement announcement
4First identified complaint t alleges internal control weakness over financial reporting
5First identified complaint alleges internal control weakness over financial reporting and refers to an internal controls weakness announcement
Cornerstone Research, “Securities Class Action Filings: 2013 Year in Review”, www.cornerstone.com.
2Allegations
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8
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The Numbers: SCA Filings
Defendants in Securities Class Actions
99%
100%
80%
CEO
80%
40%
60%
CFO
Outside Director
40%
20%
0%
Note: Percentages are for cases filed between 2000 and 2003.
Michael Klausner and Jason Hegland, 2010, “How protective is D&O insurance in securities class actions? - Part I”, Professional
Liability Underwriting Society Journal, Vol. 23, No. 2, pp. 1-4, cited by Jason D. Schloetzer, ”Corporate Misconduct and the Market
for Directorships”, Director Notes, No. DN-016, November 2010.
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The Numbers: SCA Settlements
Median Settlements 2013
• Cases without public pension fund lead plaintiff: $ 3mm
• Cases with public pension fund as lead plaintiff: $23mm
• 43% of settling cases had public pension fund as lead plaintiff:
50%
40%
30%
33% 34%
20%
10%
0%
22%
38%
40%
47% 43%
26%
12% 14%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Cornerstone Research, “Securities Class Action Settlements: 2013 Review and Analysis”, www.cornerstone.com.
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The Numbers: SCA Settlements
Settlements by Select Industry Sectors
1996-2013 (Dollars in Millions)
Industry
No. Settlements
Median Value
Financial
169
$8.1
Telecommunications
141
$6.5
Pharmaceuticals
94
$10.3
Healthcare
56
$6.0
Technology
324
$12.0
Retail
117
$8.7
Cornerstone Research, “Securities Class Action Settlements: 2013 Review and Analysis”, www.cornerstone.com.
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The Numbers: SCA Settlements
Settlements by Select Industry Sectors
• Credit crisis cases settling out:
2011: 18%
2012: 30%
2013: 22%
• Shift of settlements to pharmaceutical sector:
1996-2012: 6%
2013: 18%
Cornerstone Research, “Securities Class Action Settlements: 2013 Review and Analysis”, www.cornerstone.com.
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The Numbers: SCA Settlements
Settlements By Statutory Basis
(Dollars in Millions)
Statutory
Basis
Number of
Settlements
Median
Settlement
Section 11 and/or
12(a)(2) Only
80
$3.4
Both Rule 10(b)5
and Section 11
and/or 12(a)(2)
246
$11.7
Rule 10(b)5 Only
1,049
$6.8
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Agenda
•
•
•
•
The Numbers
The Basics of D&O Coverage
International Coverage
Current Trends in D&O Liability
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15
Types of D&O Coverage
• Side A:
–Covers losses of D&Os which are not
indemnified by the company
–No coverage for claims against the entity
• Side B:
–Reimburses entity for its indemnification
of losses incurred by D&Os
–No coverage for claims against the entity
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Types of D&O Coverage
• Side C:
–Covers losses of entity on account of claims
against the entity
–No coverage for losses of D&Os
–Typically limited to securities claims if the
entity is a public company; no such
limitation if the entity is a private or notfor-profit company.
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Types of D&O Coverage
• Side A Policies:
–Non-indemnifiable loss:
•
•
Derivative settlements or judgments (circular)
Some statutory violations (FCPA; adjudicated
securities violations)
–Non-indemnified loss:
•
•
•
Changes to right to indemnity under law/articles
Financial inability
Polarized former D&O
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Types of D&O Coverage
• Side A Policies:
–Non-dilution of limits by entity
–Broad coverage (DIC; exclusions)
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“Claim”
• Written demand
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“Claim”
• Written demand
• Civil proceeding
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“Claim”
• Written demand
• Civil proceeding
• Criminal proceeding
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“Claim”
• Written demand
• Civil proceeding
• Criminal proceeding
• Regulatory, administrative proceeding
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“Claim”
• Written demand
• Civil proceeding
• Criminal proceeding
• Regulatory, administrative proceeding
• Investigations- formal/informal
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“Claim”
• Written demand
• Civil proceeding
Complaint
• Criminal proceeding
Indictment
• Regulatory, administrative proceeding
Formal Order
• Investigations- formal/informal
Subpoena
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“Claim”
• Written demand
• Civil proceeding
Complaint
• Criminal proceeding
Indictment
• Regulatory, administrative proceeding
Formal Order
• Investigations- formal/informal
Subpoena
• Against an insured
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“Claim”
• Written demand
• Civil proceeding
Complaint
• Criminal proceeding
Indictment
• Regulatory, administrative proceeding
Formal Order
• Investigations- formal/informal
Subpoena
• Against an insured
• Seeking damages/relief
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“Claim”
• Written demand
• Civil proceeding
Complaint
• Criminal proceeding
Indictment
• Regulatory, administrative proceeding
Formal Order
• Investigations- formal/informal
Subpoena
• Against an insured
• Seeking damages/relief
• Monetary/non-monetary
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“Claim”
SEC investigation may not be a claim or a
securities claim:
• Binding adjudication for relief not possible
• Insured person may not be identified as
object of potential proceeding
• May be excluded by policy language
Foster v. Summit Med. Sys. Inc., 601 N.W.2d 350 (Minn. App. 2000), Office Depot, Inc. v.
National Union Fire Ins. Co. of Pittsburgh, Pa., 734 F. Supp. 2d 1304 (S.D. Fla. 2010), aff’d 453 F.
App’x 871 (11th Cir. 2011)
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“Claim”
SEC investigation may be a claim:
• Policy language expressly covers informal
inquiries
• SEC subpoenas and orders seeking
testimony and documents are ‘demands’
for ‘relief’
Minuteman Int’l, Inc. v. Great Am. Ins. Co., 2004 U.S. Dist. LEXIS 4660 (N.D. Ill. March 18,
2004), MBIA, Inc. v. Fed. Ins. Co., 2009 U.S.Dist. LEXIS 124335 (S.D.N.Y. Dec. 30, 2009), aff’d
in part, 652 F.3d 152 (2d Cir. 2011)
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“Claim”
State criminal investigation may be a
claim:
• Threat of criminal indictment constitutes a
demand for non-monetary relief, in policy
definition
• Investigation constitutes a criminal
proceeding as well as a state or local
proceeding, in policy definition
Gold Tip, LLC v. Carolina Cas. Ins. Co., 2012 U.S. Dist. LEXIS 120166 (D. Utah Aug. 23, 2012)
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“Claim”
Grand jury proceedings may not be a
claim:
• No adjudication for liability for damages or
other relief.
• No indictment or demand for relief
• No allegation of wrongful act of insured
JB Oxford Holdings, Inc. v. Certain Underwriters at Lloyd’s, London, 2001 Cal. App. Unpub. LEXIS
111 (Cal. Ct. App. Oct. 5, 2001); Diamond Glass Cos., Inc. v. Twin City Fire Ins. Co., 2008 U.S. Dist.
LEXIS 86752 (S.D.N.Y. Aug. 18, 2008); Fed. Ins. Co. v. Illinois Funeral Director’s Ass’n, 2010 U.S. Dist.
LEXIS 129747 (N.D. Ill. Dec. 8, 2010)
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“Loss”
• Damages
• Defense costs
• Insured legally obligated to pay
• On account of a claim
• For a wrongful act for which
coverage applies
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“Loss”
Disgorgement:
Return to shareholders of the value of
overpayment for stock
Level 3 Communications, Inc. v. Federal Insurance Company, 272 F.3d 908 (7th Cir. 2001) and
progeny
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“Loss”
Disgorgement:
Settlement with the SEC – for
overpayment by shareholders
Vigilant Insurance Company v. Credit Suisse First Boston, 800 N.Y.S.2d 358 (N.Y. Sup. Ct. 2003),
aff’d on appeal, 782 N.Y.S.2d 19 (N.Y. App. Div. 2004)
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“Loss”
Disgorgement:
Express disavowals in settlement
agreement
CNL Hotels & Resorts, Inc. v. Houston Cas. Co., 505 F. Supp. 2d 1317 (M.D. Fla. 2007)
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“Loss”
Disgorgement:
Coverage for associated defense costs
Millennium Partners, L.P. v. Select Ins. Co., 882 N.Y.S.2d 849 (N.Y. Sup. Ct. 2009)
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“Loss”
Disgorgement:
Settlement with the SEC – for
improper profits acquired by
customers
J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 21 N.Y.3d 324 (N.Y. 2013)
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Executive Compensation
• Loss
• Remuneration
• Personal Profit
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Interrelated Wrongful Acts
Policy definitions:
• ‘Causally connected’
• ‘Common nexus’
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Interrelated Wrongful Acts
Impact:
• Late notice
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Interrelated Wrongful Acts
Impact:
• Late notice
• Prior claim
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Interrelated Wrongful Acts
Impact:
• Late notice
• Prior claim
• Multiple limits
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Interrelated Wrongful Acts
Impact:
• Late notice
• Prior claim
• Multiple limits
• Multiple retentions
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Interrelated Wrongful Acts
Impact:
• Late notice
• Prior claim
• Multiple limits
• Multiple retentions
• Multiple policy terms and conditions
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Personal Conduct Exclusions
Illegal or improper profit/advantage
• “arising out of, based upon or attributable to the
gaining in fact of any profit or advantage to which the
Insured was not legally entitled“
Fraud, willful violations or criminal conduct
• “arising out of, based upon or attributable to the
committing in fact of any deliberate criminal or
deliberate fraudulent act by the Insured”
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Personal Conduct Exclusions
“Final adjudication” v. “in fact”
• “final adjudication” – established in the underlying
action, not the insurance coverage action
• “in fact” – established by any fact finder
Non-imputation clause (severability)
• facts pertaining to or knowledge possessed by one
insured shall not imputed to another insured
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Other Exclusions
Insured v. insured exclusion
• excludes any claim “brought or maintained by
or on behalf of any insured”
• exceptions:
shareholder derivative claims
claims by bankruptcy trustee/examiner or other
officials appointed by court re bankrupt estate
o whistleblower claims – maybe?
o
o
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Other Exclusions
Contractual liability exclusion
• “for any actual or alleged liability of any Insured
under any express contract or agreement”
• exception/carve back for defense costs – maybe
• insurer funds uncovered settlement to avoid further
defense costs
• future estimated defense costs if no settlement
• allocation provisions promising 100% defense costs
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Advancement of Defense Costs
•
•
•
•
•
Payment of defense costs per policy provisions
Allocation determination – who controls
Pay on a “contemporaneous basis” – means what?
Failure to make timely payments – breach?
Duty to defend v. advancement of defense costs
Gon v. First State Ins. Co. (9th Cir. 1989); Federal Ins. Co. v. Kozlowski (N.Y. App. Div. 1st Dept. 2005)
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Excess
Limits:
• Failure of primary to pay full limit
• Insolvency of underlying causing
failure to pay full limit
• Ability of insured to pay gap
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Excess
Limits:
• Failure of primary to pay full limit
• Insolvency of underlying causing
failure to pay full limit
• Ability of insured to pay gap
Inconsistent terms between layers
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Excess
Limits:
• Failure of primary to pay full limit
• Insolvency of underlying causing
failure to pay full limit
• Ability of insured to pay gap
Inconsistent terms between layers
Sub-limits within layers
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Agenda
•
•
•
•
The Numbers
The Basics of D&O Coverage
International Coverage
Current Trends in D&O Liability
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Global Programs Today
Option 1: U.S.- based tower
Option 2: U.S.- based tower and international tower
Option 3: U.S.- based tower + individual country policies/FOS
Option 4: U.S.- based tower + Lloyd’s USA coverholder Side A wrap
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Option 1: U.S. – Based Tower
Excess DIC
U.S. Tower
Side A
Excess D&O
Follow Form
U.S. Primary
D&O ABC
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Option 2: U.S. – Based Tower &
International Tower
Excess DIC
U.S. Tower
Side A
Excess D&O
International
Tower?
Follow Form
U.S. Primary
D&O ABC
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Option 3: U.S. – Based Tower &
Individual Country/FOS Policies
Excess DIC
U.S. Tower
Side A
EXCESS INTERNATIONAL D&O COVERAGE?
Excess D&O
Follow Form
Limits Tied to U.S. Primary
U.S. Primary
D&O ABC
Local Germany
Local France
Local Brazil
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Option 4: U.S. – Based Tower &
Lloyd’s USA Side A Wrap
Lloyd’s accesses up to 75 countries through licenses:
Jurisdictions in which Lloyds has a license or is otherwise authorized and where D&O is permitted*
Anguilla
Bulgaria
Finland
Hungary
Antigua
Canada
France
Iceland
Australia
Cayman I.
French Guiana
Ireland
Austria
Cyprus
Germany
Isle of Man
Bahamas
Czech Rep.
Gibraltar
Israel
Barbados
Denmark
Greece
Italy
Belgium
Dominica
Grenada
Jamaica
Belize
Estonia
Guadeloupe
Japan
Bermuda
F. Polynesia
Guernsey
Jersey
British V.I.
Falkland I.
Hong Kong
Latvia
United Kingdom
USA
Vanatu
Wallis & Futuna
*Certain countries may require individual policies to be issued
Liechtenstein
Lithuania
Luxembourg
Malawi
Malta
Martinique
Mauritius
Monaco
N. Caledonia
N. Zealand
Zimbabwe
Namibia
Netherlands
Norway
Poland
Portugal
Reunion
Romania
Singapore
Slovakia
Slovenia
South Africa
Spain
St. Barthelemy
St. Kitts & Nevis
St. Lucia
St. Martin
St. Vincent
Sweden
Switzerland
Trinidad & Tobago
• Simplified access to coverage
• Ease of use — one underwriter handles transaction
• Common terms and conditions, except on local forms
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Option 4: U.S. – Based Tower &
Lloyd’s USA Side A Wrap
U.S. Policy + Lloyd’s USA Side A Policy:
• Same terms and conditions;
• Same English language; and
• Access up to 75 jurisdictions where Lloyds is licensed
U.S. Tower
Excess DIC
Side A
Excess D&O
Lloyd’s USA
Side A Wrap
Valid for France and Germany
(and up to 75 other countries)
Follow Form
U.S. Primary
D&O ABC
Lloyd’s USA
Policy
Valid for France and Germany
(and up to 75 other countries)
Local Brazil Policy
(Limits Tied)
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Agenda
•
•
•
•
Agenda
The Numbers
The Basics of D&O Coverage
International Coverage
Current Trends in D&O Liability
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Halliburton
•
U. S. “class actions”:
• similarly situated plaintiffs
• motion for class certification
• U.S. securities fraud action:
• misrepresentations case
• reliance
• at class motion stage
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Halliburton
Filings by Allegations (Percentage of Total Filings1)
Allegations
2009 2010 2011 2012 2013
Misrepresentations in financials
89%
93%
94%
95%
97%
False forward looking statements
Insider trading
51%
45%
56%
62%
54%
14%
16%
12%
17%
17%
GAAP violations2
37%
26%
37%
23%
24%
Announced Restatements3
10%
7%
11%
11%
11%
Internal Control Weaknesses4
Announced Internal Control Weaknesses5
14%
23%
24%
20%
20%
4%
3%
6%
8%
8%
1Percentages
do not add up to 100% as complaints may include multiple allegations
represent GAAP allegations even if GAAP not expressly referenced
3First identified complaint alleges GAAP violation even if GAAP not expressly referenced, and refers to restatement announcement
4First identified complaint t alleges internal control weakness over financial reporting
5First identified complaint alleges internal control weakness over financial reporting and refers to an internal controls weakness announcement
Cornerstone Research, “Securities Class Action Filings: 2013 Year in Review”, www.cornerstone.com.
2Allegations
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Halliburton
 Old rule: Prove individual reliance
 New rule, 1988: Reliance presumed
(Basic v. Levinson)
 Misrepresentations impact price
 In a stock traded in an “efficient market”
 Hence reliance may be presumed for
that stock
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Halliburton
Halliburton v. John Fund
 U.S. Supreme Court
 Argued March 5, 2014; decision by June?
 Issues:
1. Should class-wide reliance be derived from the
fraud on the market theory?
2. Whether the presumption of reliance may be
rebutted by evidence that the alleged
misrepresentation did not distort market price?
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Halliburton
 Options:
 Affirm Basic
 Only recovery vehicle for many smaller
investors
 Impact: Litigation and coverage
environment stays the same
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Halliburton
Options:
 Overrule Basic- require proof of
individual reliance
 Fewer SCA filed?
 But still:
- Omissions cases
- Section 11 and 12 cases
- Individual actions
- Collective actions
- Regulatory actions
- State actions
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Halliburton
Options:
 Permit the resumption of reliance to be
rebutted by evidence that the alleged
misrepresentation did not distort market
price
 Impact:
 More discovery, experts, motions, hence
higher costs
 Potentially more dismissals, but at the
higher cost
 Potentially cheaper settlements?
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Securities & Exchange Commission
 Private Bar:
 3,050 SCA 1997-2012
 $73.1 billion recovered ($12B/yr)
Halliburton Co. v. Erica P. John Fund, Inc., Brief for Former SEC Commissioners and Officials and
Law Professors as Amici Curiae.
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Securities & Exchange Commission
760
740
720
700
680
660
640
620
SEC Enforcement Actions Per Fiscal Year
735
734
686
681
664
2009
2010
2011
2012
2013
2013:
• 20% increase in formal orders of investigations by Enforcement Division
• 3.4B in disgorgement and penalties for resolved cases
• 10% higher than FY2012
• 22% higher than FY2011 (which was highest number of filings in
agency history)
SEC Press Release 2013-264, SEC Announces Enforcement Results for FY 2013 (Dec. 17, 2013).
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Securities & Exchange Commission
2013: Types of Enforcement Actions
Broker-Dealer
23%
Investment
Advisor/Invest
ment Company
27%
Securities
Offering
20%
Market
Manipulation
9%
Financial
Fraud/Issuer
Disclosure
13%
Insider Trading
8%
SEC Press Release 2013-264, SEC Announces Enforcement Results for FY 2013 (Dec. 17, 2013).
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Securities & Exchange Commission
Monetary Sanctions in SEC Enforcement Actions
(in billions & by fiscal year)
$3.5
$3.0
$2.5
22%
$0.975
$1.20
$1.50
$0.345 $1.03 $0.928
10%
$1.021
$1.167
$2.0
$1.5
$1.0
$1.90
$2.30
$1.60
$0.507
$1.093
$0.5
$2.09 $1.82 $1.878 $2.083 $2.257
$0.256
$0.774
$0.0
2004
2005
2006
2007 2008 2009 2010
Disgorgement
Penalties
2011
2012
2013
SEC Press Release 2013-264, SEC Announces Enforcement Results for FY 2013 (Dec. 17, 2013).
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Securities & Exchange Commission
 Three major shifts:
1. Looking first at individuals (targeting)
2. Admissions may be required
3. Increased aggressive use of penalties
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Securities & Exchange Commission
 Three exposure issues:
 Removal of corporate indemnification
 Application of policy exclusions
 Application of state law on
uninsurability of intentional wrongful
acts
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•
•
•
•
The Numbers
The Basics of D&O Coverage
International Coverage
Current Trends in D&O Liability
Questions?
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Demystifying D&O Liability & Insurance:
Numbers, Basics, & Trends
Leslie A. Lamb
Director of Global Risk Management
Cisco Systems, Inc.
Edward M. Joyce
Partner
Jones Day
Carol A.N. Zacharias
Deputy General Counsel
ACE North America
Recording of this session via any media type is strictly prohibited.
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