New challenges for the D&O market.

• Author: MEINERS, CARY

The Internet and the trading tactics of individual investors are among the emerging forces that are increasing market volatility and creating an atmosphere for additional securities-related lawsuits.

NEW TECHNOLOGIES, changes in investment activity, and recent market trends are converging to create stock trading volatility. We see evidence that this volatility is creating more securities lawsuits against the directors and officers of private and public corporations. In turn, for the directors and officers (D&O) insurance industry, these issues could result in higher settlements by the carriers and a squeeze on what has been a profitable business niche within the insurance industry.

Of course, volatility in and of itself does not guarantee a lawsuit. But negative news about a company's operations is more likely to cause the stock price to drop in an environment of increased volatility. In some cases, this environment increases the likelihood that disappointed investors and frustrated stockholders take the matter to court.

However, directors and officers should not look to the courts for relief anytime soon. Despite passage of the Private Securities Litigation Reform Act of 1995, which made it more difficult for plaintiffs to file lawsuits, there are approximately 600 cases now pending in federal securities courts. If all of these cases reach a final decision or settlement, they would be worth $5.5 billion with an average settlement of at least $9 million. While judges in federal district courts have handed down varying interpretations of the Private Securities Litigation Reform Act, the U.S. Supreme Court has yet to hear any cases arising from the Act.

Unfortunately, clarification of the Act by the U.S. Supreme Court is years away and litigation reform by Congress and state governments is not imminent. In the meantime, corporate directors and officers and the D&O industry need to be aware of emerging forces that are increasing market volatility and creating an atmosphere for additional securities-related lawsuits.

The Internet

The Internet is truly a unique challenge for the D&O industry. In the past, insurance companies could choose a strategy for underwriting technology accounts. A small percentage of insurers aggressively sought out technology business. Others would write select classes or fix a certain percentage of technology accounts relative to their overall book of business. A few carriers avoided technology business. But, because...