Class-Action Lawsuits on the Rise, Forcing Higher Premiums for IPOs

Insurance premiums have quadrupled for IPO companies over the past two years.

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Publicly-traded companies in the U.S. should expect higher insurance premiums this year, thanks to a skyrocketing number of class-action lawsuits. The risk of being sued through a class-action suit is particularly high for directors and officers (D&O) at the executive level, especially when they overlook their fiduciary duties.

Woodruff Sawyer, an insurance broker and consulting firm, said that overall, insurance premiums quadrupled for IPO companies over the last two years, namely for D&Os. Another elite insurance brokerage firm that services Fortune 500 companies said that clients are spending an average of 24 percent more for their premiums than they were a year ago.

Overall, over the last decade, lawsuits against companies have risen approximately 150 percent. And, as lawsuits increase, so do the premiums, particularly for liability covering top-tier executives.

According to Chubb, a Swiss-based insurance firm that operates in the U.S., ten percent of S&P 500 companies were embroiled in class-action lawsuits in 2018.

Some of the more notable lawsuits in recent history have been due to data breaches, airplane crashes, wildfires, opioid cases, and sexual misconduct suits. The suits have cost insurance brokers hundreds of millions in settlements.

Scott Meyer, Chubb’s division president, said in a report: “You can expect to see a securities class action filed whenever there is an event followed by a drop in stock price…But now, even events that didn’t move the stock price are triggering securities class actions against the board.”

The lawsuits allege that directors and officers are failing in their fiduciary duties. One such suit involved Well’s Fargo’s CEO, Tim Sloan, and the outgoing CEO, John Stumpf, as well as 18 of the company directors and executives. The suit accused them of failing to prevent millions of bogus consumer accounts from being created. The derivative lawsuit was settled for a whopping 240 million in 2019, and the company’s insurance picked up the tab.

In derivative lawsuits, the suit is filed on behalf of a company against the company’s executives and directors. A portion of the settlement is paid to the same company paying the insurance premiums.

Wynn Resorts also recently settled a consolidated derivative suit for $41 million. The lawsuit followed a #MeToo scandal which involved Wynns founder and CEO, Steve Wynn. In that suit, Wynn will be responsible for paying out $20 million, while Wynn Resort’s insurers will pay out $21 million. The settlement is still awaiting final court approval. The company also agreed to overhaul its board of directors.

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