RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul...

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RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior Vice President, Willis Rich Inserra, Principle, Insurance Strategies LTD.

Transcript of RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul...

Page 1: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

RIMSFAIRFIELD/WESTCHESTER CHAPTER

Brian Weiss, Vice President, FINEX North America, Willis

Paul Figliozzi, Managing Director, Marsh

Richard White, Senior Vice President, Willis

Rich Inserra, Principle, Insurance Strategies LTD.

Page 2: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

Commercial Segment Market Update – Q2’14

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– Public company rates were down compared to 1H’13

• But…primary layers increased by 1.3%

• …And retentions increased for 10% of client renewals

– Significant disparity in renewal outcomes

• Insureds with risk-specific headwinds experienced more challenging environment

– Midsize and large private – companies continue to face

challenging renewals

• Average total program rate decrease in Q2’14 was 1.1% (public)• Average total program rate increase in Q2’14 was 1.7% (private)

Page 3: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

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Commercial Segment Market Update – Q2’14

• Two noteworthy litigation trends: (1) IPOs; and (2) Regulatory actions

• Litigation frequency and severity at historical levels

• Insurer appetite and commentary

Page 4: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

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DERIVATIVE ACTIONS: WHAT ARE THEY?

The term derivative action refers to:

A suit by a shareholder to enforce a corporate cause of action

The corporation is a necessary party, and the relief which is granted is a judgment against a third person in favor of the corporation

An action is a derivative action when based upon a primary right of the corporation, but asserted on its behalf by a stockholder because of the firm’s failure, deliberate or otherwise, to act upon its primary right.

Derivative suits can be brought against both public and private organizations.The right to bring a derivative action can be found in local law in many countries around the world.

Page 5: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

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WHY SHOULD WE CARE?

Prior to the recent surge in large settlements, the major exposure to D&O insurance policies resulting from derivative actions were defense costs and awards for plaintiff attorney’s fees

Now, corporate directors and officers and their insurers also must be concerned about potentially large monetary settlements – which may not be indemnifiable.

“ Derivative actions that are likely to be of ongoing value to companies and their shareholders are ‘cases seeking the return of a substantial benefit’ to the company, which ‘pose a ...threat of personal loss to individual defendants.’ „

~ Kenneth B. Davis, Jr., Dean of the Wisconsin Law School

Page 6: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

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THEY’RE BACK

These claims originated in early nineteenth-century English common law and the US Supreme Court had formally recognized derivative suits by 1855

Despite being a “sleeping giant” for many years, derivative suits are resurfacing with huge ramifications resurging perhaps due to the tightened rules for bringing federal securities class actions created under the Private Securities Litigation Reform Act of 1995 (limiting these to 1 suit/1 law firm per case)

Organizations that ignore the prevalence of derivative actions potentially leave their directors & officers susceptible to huge monetary settlements as well as corporate governance changes

The newest waves: derivative suits alleging excessive compensation, related to M&A transactions and now cyber hack attacks.

Page 7: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

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RECENT DEVELOPMENTS IN DERIVATIVE SUITS

Derivative Litigation

From the standpoint of the executives and their D&O insurers: derivative settlements are largely non-indemnifiable (A-Side)

M&A (or Merger Objection Suits)

Significantly, some are brought as derivative suits

Executive Compensation

After the first proxy season of shareholder "say-on-pay" under Dodd-Frank Act, shareholders have filed derivative suits against the boards of several of the companies failing to win majority approval.

Growing number of large monetary settlements:

HealthSouth/ Scrushy $2.9B

Grupo Mexico $2.3B

AOL Time Warner $200M

News Corp. $139M

Broadcom $116M*

AIG $114M

HealthSouth $100M

Cendant $60-$70M

Bank of America $62.5M

Comverse $60M

Sunrise Senior Living $13M

Belmont National Bank $10M

Page 8: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

Class Action Case Filing Trends:

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– Of new class actions filed in the first four months of 2014 annualizes at 207 new class actions

– Mix of cases has changed. For example, in 2013 and the first few months of 2014, there was a steep rise in class actions based on allegedly false and misleading earnings guidance, well above the number of cases alleging accounting fraud.

– Number of “merger objection” cases (including breach of fiduciary duty cases) is projected to decline in 2014

Filing and settlement trends continue to reflect a “steady state” of several hundred cases a year, notwithstanding the virtual disappearance of credit crisis class actions

Page 9: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

Filing By Industry Sector:

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– Financial institutions are now in a second place tie with the technology sector (each with 14% of all new case filings)

– The health technology sector leads with 19% of new case filings

– Biggest jump in filings on a percentage basis compared to 2013 is the consumer sector, where new filings doubled from 2013 levels

Trends in new case filings against particular industry sectors reflect the decline in “credit crisis” cases, as new suits against financial institutions

Page 10: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

Class Action Settlements:

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– The last few years also included the settlement of a number of the major credit crisis cases totaling several billion dollars

– Several factors that contribute to settlement value, such as (i) the amount of D&O insurance; (ii) the presence of parallel proceedings, including government investigations and enforcement actions; (iii) the nature of the events that triggered the suit, such as the announcement of a major restatement; (iv) the range of provable damages in the case; and (v) whether the suit is brought under Section 10(b) of the Exchange Act or Section 11 of the Securities Act

Median settlement amount of $44 million in 2014 to date—generally a better barometer of settlement trends—was down significantly compared to 2013

Page 11: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

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SEC SHIFTS

The SEC has Shifted From it’s “NO – ADMIT – or – DENY” Policy to requiring admissions in cases of “widespread harm to investors” or “egregious intentional misconduct”

Conduct Exclusion

Severability

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SEC Enforcement Update

• Financial Fraud Task Force

• Whistleblowers

o Update on awards

o Unlawful retaliation

• Cooperation Agreements

• Public Company Reporting and Accounting.

o Financial Fraud Actions: Diamond Foods; CVS Caremark; DGSE Companies

• Insider Trading

Page 13: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

D&O Coverage Considerations: Trend Toward Multinational Placements

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• Litigation and regulatory developments are compelling multinational corporations to reassess their ‘global’ D&O coverage

• In the litigation context securities class actions and derivative claims are on the rise as recent U.S. Supreme Court activity has limited the ability of overseas plaintiffs to bring claims in the U.S.

• Jurisdictions where versions of U.S. – type litigation may materialize:

o Canada; United kingdom; Netherlands; Germany; Australia; Mexico; Japan; China

• Overview of the regulatory framework

o Canada and United Kingdom

o Anti-Bribery Legislation in Europe and Brazil

• Regulatory enforcement activity

• Insurance considerations:

o Policy response to securities litigation and regulatory investigations (defense costs and settlements)

o D&O broker expertise in global playing field

Page 14: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

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D&O Coverage Considerations: Compensation Clawback Coverage

• Directors and Officers within the reach of U.S. regulators face exposure to claims seeking to ‘claw back’ their previous compensation.

o Both the Sarbanes-Oxley Act of 2002 (SOX) and Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) authorize ‘clawbacks’.

• SEC’s willingness and ability to pursue no-fault clawbacks: CSK Auto Corporation (2010) ; Beazer homes (2011); Arthrocare (2012)

• Prior rulings upholding the SEC’s right to pursue clawback actions under Section 304 even in the absence of allegations that the misconduct led to restatement.

• SEC’s clawback authority has even broader implications in the wake of the enactment of the Dodd-Frank Act, which makes a much broader range of corporate officials potentially subject to clawback liability.

o The Dodd-Frank provision is quite a bit broader than Sox Section 304, as it extends to all executives, ‘material noncomplaince’ vs. misconduct, reaches back three years and applies to all incentive based compensation.

• In response to these measurers, some insurance companies began offering coverage, to protect individuals from compensation clawback actions.

• Coverage applies to the costs and attorney fees incurred by executives during any compensation clawback action, as well as reimburse any lost salary or other damages arising from non-intentional wrongful acts by executives

Page 15: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

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HALLIBURTON

The Supreme Court decides on the future of Securities Class Action Lawsuits

Page 16: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

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CASE FOCUS: HALLIBURTON II

Setting: The issue considered by the Supreme Court and finally ruled on June 23, 2014 is the Basic v. Levinson decision which confirmed the fraud-on-the market theory. The Basic presumption eased the class certification process for plaintiffs by assuming that all information in the marketplace is known and relied upon by shareholders in making investment decisions (the efficient market theory) to establish securities fraud in a class action.

Outcome: The U.S. Supreme Court did not over turn Basic, however, it did grant defendant companies the opportunity to rebut the presumption at the class certification stage by introducing evidence that the alleged misrepresentation did not in fact affect the stock price—thereby giving them the opportunity to deny class certification.

Takeaway: At a minimum, Halliburton II sets the stage for a “battle of the experts”, which will increase costs for defendant companies seeking to establish a lack of pricing impact at the class certification stage.

Market Response: Event Study Endorsements… No SIR

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D&O Case Example 1

2005 - Company is served with a derivative lawsuit (“Lawsuit 2005”) alleging that D&O breaches led to regulatory fines and investigations concerning safety issues. Company is insured by Insurer ABC.

2006 - Company settles lawsuit 2005. Settlement includes corporate modifications to address safety concerns.

2010 - Fire at Company warehouse kills 10 employees.

2010 - Company receives new derivative (“Lawsuit 2010”) alleging D&O breaches related to safety concerns led to the fire and 10 employee deaths. Company is insured by Insurer XYZ.

2010 - Company received contempt motion in Lawsuit 2005. Company insured by Insurer XYZ.

Policy ABC will respond to Lawsuit 2005 in 2005.

Which policy responds to Lawsuit 2010?

Which policy responds to the contempt motion filed in 2010 in Lawsuit 2005?

Page 18: RIMS FAIRFIELD/WESTCHESTER CHAPTER Brian Weiss, Vice President, FINEX North America, Willis Paul Figliozzi, Managing Director, Marsh Richard White, Senior.

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D&O Claim Example 2

D&O Claim REFCO, INC. October 2005

Refco was one of the world’s largest providers of brokerage and clearing services in the international derivatives, currency, and futures markets.

Refco bought a D&O policy prior to their initial public offering, (IPO).

Two months after the IPO it was discovered that there was an outstanding receivable of $430 million to Refco from a company controlled by the CEO, Phillip Bennett that was not disclosed in the offering. This discovery led to bankruptcy and an immediate loss of $1 Billion in market capitalization.

The CEO plead guilty and admitted knowledge of the fraudulent scheme. The bankruptcy judge ordered the 1st and 2nd layers to pay defense costs for the other directors that had no knowledge of the scheme because their policies had a severability provision. The 3rd and 4th layers denied coverage because their policies state that prior knowledge by one Director excludes coverage for all D&Os. The policy did have “following form” language. Is there coverage?