Equities markets increase risks for D&O, warns insurer

Volatility in the financial markets is one of the largest threats to large multi-national firms who are risking the threat of increased claims including class actions, according to insurer Zurich Global Corporate UK.

Highlighting recent analyst reports, Zurich stated that the severity of securities class actions is increasing and the cyclicality of these class actions is driven by the volatility of the stock markets, particularly in the US. In the current financial climate, this is a major source of concern to many as the full impact of the subprime crisis and its ensuing liabilities, unfolds across the globe, said the insurer.

Litigation funding and the growth of UK based class actions is another growing trend highlighted by the insurer. The growing trend for litigation brought by third party funders and the growth of US law firms in the UK is something directors should be aware of, said Zurich. Notably both the BA class action and Parmalat cases have been funded by UK based American firms.

Consumer actions were also highlighted as an interesting new development. In March 2007 the consumer association ‘Which?’ issued the first ever representative action under the Enterprise Act against JJB Sports Plc on behalf of 130 consumers, following the Office of Fair Trading’s decision that JJB and others had infringed competition rules by participating in arrangements to fix prices of replica football shirts. (This ties in to a European Commission initiative aimed at approving redress for consumers across all member states as part of its consumer strategy 2007 - 2013).

Extradition

The much publicised ‘NatWest Three’ extradition case generated an unprecedented level of scrutiny for directors and officers liability exposure, and continues to be a headline grabber with the media e.g. in addition to the ‘NatWest Three’ case there’s speculation about BA/Virgin executives and BAE Systems executives and Ian Norris of Morgan Crucible. Whilst most of this activity has focussed on the US, in theory the risk extends to any country Globally including the Russian Federation, Azerbaijan, Albania, Macedonia, Montenegro.

Internationally compliant cover

“Litigation funding and the growth of UK based class actions is another growing trend highlighted by the insurer.

The crucial issue here is whether the individual (host) country permits an insurer registered in the UK, for example, to issue a D&O policy in a country where it doesn’t have a licence to do so. If this is managed incorrectly, their D&O cover could be void and they could face the threat of criminal prosecution in addition to the above liabilities. In the last year, Zurich Global Corporate UK has seen requests for internationally compliant cover rise dramatically from less than 1% of clients to in excess of 70% of D&O clients and their insurance brokers.

Paul Schiavone, chief underwriting officer, Directors & Officers liability insurance, Zurich Global Corporate Europe said: ‘With the total value of settled US securities actions growing five-fold in 2006 compared to the previous year (from $3.22 billion in 2005 to $10.06 billion in 2006) 1 there is no doubt that the exposure senior executives face has reached dramatic proportions.’

‘There has never been a greater need for businesses to ensure that the D&O cover they have in place, is compliant in all the countries they operate in. Aside from the fact these companies are leaving themselves open to potentially huge losses because their D&O cover could be voided by local country authorities, they could also face serious legal consequences for having non-compliant policies in place.’

‘Many companies currently use one insurance policy to cover all of their global exposures which is at best, insufficient, because insurers can deny claims in certain countries, where the local authorities will not allow them to pay.’

Schiavone continued: “With more than 200 insurance jurisdictions around the world, and rules that can change at any time, it’s important to keep abreast of developments. Failing to understand and meet these from the start can result in serious problems later. For example, many countries require you to issue a policy locally, in the local language and with terms and conditions in accordance with the local jurisdiction.

‘The issue here is that whether this is requested or not, having D&O cover that’s compliant with local country requirements is a legal requirement. Zurich is speaking to all its clients about this issue, not just across D&O, but in other areas too.’

‘The European Economic Area is probably the least problematic part of the world to place an insurance programme. The United States, with its fifty different regulators, is among the most complex to manage and Australia, Latin America and several Asian countries including China and Japan can also be very detailed. The implications go all the way up to the Board of Directors. If the company is embarrassed in this way, the shareholders may not be too impressed,’ said Schiavone.