Increasing US litigation puts pressure on D&O insurers

The dominant theme for US directors’ and officers’ (D&O) liability insurers has been steadily falling rates.

The market has been softening since 2022, a decline coinciding with the start of the Russia-Ukraine war and running parallel to falling numbers of initial public offerings.

Although experts believe rates will continue sliding downwards, analysts have identified some trends that would tend to ease or reverse market softening.

Among them is the rising numbers of US securities class action lawsuits in recent years, both in federal and state courts. Investors filing such suits claim a firm has reduced the value of their shares because corporate leaders have broken securities laws or made misleading representations about their business.

The number of securities class action lawsuits rose from 175 in 2022 to 199 in 2023 and 210 last year, according to Stanford Law School.

David Blades, associate director at AM Best, says higher awards have encouraged an increase in the number of suits, with $4.1bn in total settlements in 2024 alone, excluding cases with individual settlements exceeding $1bn.

AM Best says attorneys are focusing more attention on smaller enterprises (those with a market capitalisation of less than $2bn). Since there are more smaller companies, this trend implies a greater volume of cases.

A number of companies have faced lawsuits in relation to misleading claims about artificial intelligence (AI), sometimes called “AI-washing”, which may have swelled total case numbers, Blades says.

Eric Wedin, head of financial lines for North America at Allianz Commercial, says the rising volume of lawsuits is partly a return to the norm. The number of securities class action filings fell between 2020 and 2022, possibly as a result of the Covid-19 pandemic. In 2019 the US saw 291 securities class action lawsuits, falling nearly 30% to 219 in 2020.

Wedin expects the number of securities lawsuits to keep increasing in 2025. “Additionally, there are around 500 open cases yet to be resolved from earlier years and 58% of them are against mid- to large-cap companies,” Wedin says.

The impact of this on US D&O pricing is complex. “It is challenging to quantify but it appears we are seeing fewer markets competing for specific layers within programmes than in previous years thus creating less pricing pressure,” Wedin says.

Nonetheless, there is still significant capacity, which continues to weigh on pricing, Blades says.

However, both Wedin and Blades think the decline in D&O rates may slow or halt in 2025, echoing others’ predictions. Two carriers recently left the market, Wedin says, while Blades mentions increased litigation as one of several factors that could stem falling rates.

The growth of third-party litigation funding (TPLF) is one factor that has been driving litigation volumes. Outside investors can fund plaintiffs in the hopes of taking a share of the proceeds of the settlement or judgment. This flood of outside capital allows plaintiffs to pursue more and longer lawsuits and discourages them from accepting out-of-court settlements.

Insurers have longed called on legislators to limit or prohibit TPLF, saying it is negatively affecting insurers and generating higher premiums for personal and commercial policyholders.

In a 2021 paper, Swiss Re estimated 57% of awards in TPLF cases went to “lawyers, funders and others”, compared with a 45% average in other tort lawsuits.

The American Property Casualty Insurance Association has suggested “common sense” reforms to “restore fairness”, such as legislation that requires transparency and mandatory disclosure of TPLF agreements, increased discoverability of those arrangements when needed in litigation and state- and federal-level regulation of funders.

Wedin doubts policymakers will make much of an effort on tort reform in general, and not at the national level. However, lawmakers could subject TPLF investors to greater disclosure requirements and other regulations.

“I am cautiously optimistic governments and courts are likely to pay more attention to litigation funding practices potentially leading to new regulations or guidelines given the issues with transparency and conflicts of interest,” Wedin says.

Federal and state lawmakers may also restrict foreign funding of US lawsuits on national security grounds, according to the Insurance Information Institute (III).

“Members of Congress have raised concerns TPLF threatens national security because of investments in lawsuits by foreign adversaries and have asked the US Supreme Court to assess the issue,” a spokesperson for the institute says.

The III points out several states are considering laws that would make TPLF more transparent or restrict foreign investment in litigation. Earlier this year, Georgia’s governor, Brian Kemp, proposed legislation that would limit the ability of outside funders to direct litigant strategy and bar “hostile foreign adversaries” from participating in TPLF enterprises.