Known as D&O insurance, these policies protect board members and company leadership against personal liability for the decisions and actions they took performing those roles. The policies are often triggered by a notable dip in stock price or a major merger or acquisition that some investors oppose.
There were 217 securities class action suits filed against both foreign and domestic companies listed in the U.S. in 2018, a slight uptick from the 216 suits filed in 2017 and the highest number in 20 years, according to a report by insurance brokerage Woodruff Sawyer & Co.
The number of class action lawsuits filed against foreign companies, however, rose 39% to 47 in 2018. Roughly 20% of the companies listed on the Nasdaq and New York Stock Exchange are headquartered outside the U.S., with 4.5% of these foreign entities sued in 2018, the report said.
The financial risk associated with these lawsuits has also climbed. The dollar amount of settlements for both foreign and domestic companies in 2018 rose 71% to $2.4 billion from $1.4 billion in 2017, according to Woodruff Sawyer. The median settlement amount was the highest in the past 10 years, with the finance sector paying out the most at $941.5 million.
The increase in both lawsuits and financial risk is pushing up the cost of D&O insurance for foreign companies, which for many years paid less for this protection than domestic companies, said Priya Huskins, a partner and senior vice president at Woodruff Sawyer.
“The cost of D&O insurance is on the rise for foreign filers and often in a dramatic way,” Ms.Huskins said, estimating that premiums have increased anywhere between 6% and 30%. Ms. Huskins said the disparity in premiums paid by domestic and foreign companies stemmed from insurance providers systematically underpricing the risk associated with foreign U.S.-listed companies for several years.
That risk can be substantial. Alibaba Group Holding Ltd. agreed to a $75 million settlement last year, one of several notable settlements. The Chinese internet giant faced a class action suit filed in 2015 by law firm Robbins Geller Rudman & Dowd LLP on behalf of purchasers of Alibaba American depositary shares that faulted the company for not disclosing meetings with China’s State Administration of Industry and Commerce before its $25 billion public offering in 2014.
A spokesman for Alibaba Group didn’t respond to requests for comment.
“The best way to think of D&O insurance is it’s malpractice insurance for board members and company leadership,” said Scott Meyer, division president of financial lines, North America, at insurance carrier Chubb Ltd.
Investor anger over the handling of sexual harassment accusations or a cybersecurity breach have also emerged as increasingly common reasons for lawsuits. The vast majority of the cases are settled, Mr. Meyer said.
Company leaders could be at risk of losing personal assets without this type of protection, prompting the vast majority of businesses to seek the coverage. “I would say 99.9% of companies have the coverage,” Mr. Meyer said.
Chubb executives have noted the growing frequency of lawsuits and growing size of settlements, which has translated into higher premiums.
“Something needs to be done, because it’s not sustainable,” said John Keogh, chief operating officer at Chubb. Contributing to the growing cost of these suits are the climbing costs of legal services.
“In the past it was a cottage industry for a few defense firms,” Mr. Meyer said. “Now, with a pot of money at the end of the game, so many different law firms have entered the field, driving costs and expenses.”