Insurance: Home guard

Can we expect a rash of major directors’ and officers’ claims to hit the UK? asks John Turnbull

One could be forgiven in the current climate for ­adopting Private Frazer’s helpful advice in Dad’s Army: “We’re all doomed, I say. Doomed.” Given some predictions concerning directors’ and officers’ (D&O) claims, one could expect D&O insurers to take the same attitude as the lugubrious Scottish coffin-maker. But would it be better to be guided by Lance-Corporal Jones’s favoured phrase of “Don’t panic”?

Current estimates of global losses that could affect D&O policies arising from the financial crisis are in the billions of dollars. In the US, the well-publicised recent cases of Bernie Madoff and Sir Allen Stanford sit on top of an already fevered litigation environment, with Royal Bank of Scotland (RBS), Lehman Brothers, AIG, Bear Stearns and numerous other companies – and their directors and officers – targeted by the plaintiff bar.

Obviously, for insurers in the UK writing those particular US risks, the claims picture will be studied very carefully. There have been some moves in the US in recent years to counter the culture of suing as soon as the stock price drops, most notably the need to demonstrate a causative link between a company’s pronouncements and the rise and fall of the stock price. It has become much easier, as a result, for defendants to knock out claims at the relatively early motion to dismiss stage. Nevertheless, most ­commentators consider that there will be aggressive regulation by the Securities and Exchange Commission under the new US administration, leading at the least to an increase in defence costs claims, and that the fallout from the recent and ongoing financial failures will be long and deep. Nor does the plaintiff bar seem to be going away, despite the recent incarceration of one of its biggest stars, Bill Lerach. In fact, with the internet, it is easier and quicker than ever for the plaintiff bar to gauge and garner support for actions.

In the UK, there has been similar criticism of the Financial Services Authority and other regulators, and it can be expected that defence costs relating to investigations will increase as a result of more concerted action on the part of the regulatory authorities. However, is it likely that we will see more D&O claims against companies like RBS?

The main barriers to US-style investor litigation against companies in the UK have traditionally been, (i) a lack of attractive funding arrangements; (ii) a lack of an easy mechanism for ‘class action’-style claims; (iii) no ‘punitive’ damages awards; and (iv) a different cultural attitude towards bringing such actions, itself to some degree the product of (i)-(iii).

There are, however, signs that a number of these barriers are being removed in this country.

Although there is not the same level of share ownership among individuals, ­attitudes towards the banks and other ­companies have hardened considerably, and pension funds and councils in particular are reported to be considering launching proceedings against such companies.

There are also moves to shift funding arrangements. The current review being conducted into civil costs by Lord Justice Jackson is looking, among other things, into the possible introduction of contingency funding arrangements, which would be a significant step from the conditional fee arrangements currently in evidence.

There also appears to be more players involved in ‘after the event’ insurance – one of the perceived obstacles to bringing an action in this country is the general rule that ‘the loser pays’. Added to this is a ­potential relaxation of collective action rules, both here and in Europe. The European ­Commission published its green paper on consumer collective redress in November 2008, which floats the idea (among others) of pan-European class actions. In England the Civil Justice Council (CJC) submitted its final recommendations to the Government in December 2008 on collective redress, which include broadening the groups of representative bodies that could bring claims. Unlike the Commission, the CJC also broadly supports the possible ­introduction of contingency fees.

Where there has been no change to date is with the system of having a judge rule and with the unavailability of punitive damages. There is nothing to suggest that this will change, and this at least enables insurers to evaluate more confidently the potential ­losses involved. Allied to this, there is still a difference in attitude of the ordinary consumer to bringing claims against companies and their directors.

Although a shift in the claims environment can be detected, this would need to be magnified significantly in order for us to see D&O claims here emulating those in the US. It is notable that, although potential UK claimants against RBS are now reportedly being courted by some law firms, this is in terms of a ‘class action’ in the US, not in this country.
Furthermore, on the positive side for D&O insurers, rates are generally expected to harden and the level of interest in buying D&O cover – from a financially stable and trusted insurer – has gone up significantly.

So although D&O insurers writing UK business may not be doomed, the storm clouds are gathering and the phoney war may be about to end. Time, as Captain Mainwaring might have said to both Private Frazer and Lance-Corporal Jones, to “pull yourself together”.

Jon Turnbull is a partner in the insurance practice at Clyde & Co