Elephant in the room: why are we afraid to talk about managing claim costs?

• Author: Hogrefe, Kim
• Position: RISK MATTERS

THE U.S. STOCK MARKET has just suffered through one of its worst years in history--one that will put more companies at risk for securities class action litigation. In fact, a trend toward more litigation was already taking shape in the first half of 2008, in large part as a result of the credit crisis and market volatility, according to a study by NERA Economic Consulting.

As of mid-December 2008, shareholder class action filings were on pace to reach almost 267 by the end of 2008, which would represent a 37% increase over 2007 and the largest annual total since 2002, according to NERA's report ("2008 Trends in Securities Class Actions"). At that rate, filings will have more than doubled in just two years from their recent low of 131 in 2006.

At the same time, attorney fees have also been on the rise. Attorneys at some of the top New York law firms, for instance, are now billing as much as $1,000 an hour.

As the demand for legal services rises and legal defense costs escalate, companies will be at a disadvantage if they do not have a contingency plan in place to manage the threat of a securities class action lawsuit. By planning ahead and developing a strategy to cope with a securities litigation, companies can help to keep their legal defense costs under control, reduce the potential for billing disputes with their law firms and insurers, and better manage their insurance premiums as well.

To get started, companies should meet with their insurance broker, directors and officers (D&O) underwriter, and claim representative when their policy comes up for renewal. At the meeting, three items should be on the agenda:

--Selection of counsel;

--Review of bill payment guidelines; and

--Establishment of bill review process.

The policy renewal period offers a good opportunity to establish the level of importance attached to each item and ensure that all parties are in alignment on this. Once the policy has been renewed, the team should meet again to begin moving forward on each of these three items.

Selection of Counsel: Under their D&O liability insurance policy, defendants generally have the right to choose their own legal counsel, subject to the insurance company's consent, which shall not be unreasonably withheld. Most companies, however, wait until after a lawsuit is filed to begin their search for a law firm. This puts the company in a weak bargaining position because it is under pressure to quickly line up its legal counsel.

Instead of...