The Rising Tide of Securities Class Action Lawsuits: What Companies Need to Know

2024 has witnessed a notable surge in securities class action (SCA) lawsuits, bringing renewed concerns for corporate executives and board members. As these legal challenges grow in frequency and severity, their impact on Directors & Officers (D&O) liability insurance and the broader insurance landscape has been significant. Understanding these developments is crucial for companies looking to safeguard their financial health and leadership.

A Surge in Securities Class Action Filings

Securities class action filings increased slightly (14%) from 2023 to 2024, to a total of 225 cases. While the absolute number of cases realigns with pre-pandemic averages dating back to 1997, the severity of these claims has seen a dramatic rise. A key indicator, the Disclosed Dollar Loss (DDL), which represents the estimated financial damage caused by corporate fraud or misstatements, increased by 23% year over year. The average DDL from 1997 to 2023 was $237 million, whereas 2024 saw an average of $438 million—nearly double the historical norm.

This increase in both frequency and severity means companies are at a higher risk of litigation, and the financial repercussions of these lawsuits are growing. When a company faces an SCA lawsuit, not only must it contend with potential settlement or judgment costs, but it also faces soaring legal fees. The average hourly rate for a partner in SCA litigation now stands at $1,800, with some cases reaching $2,400 per hour. These escalating expenses highlight the critical need for robust D&O insurance coverage.

Impact on the D&O Insurance Market

D&O insurance is a long-tail business, meaning claims take years to develop fully. While the immediate market impact is still unfolding, insurers have already begun adjusting their underwriting strategies.

Although the insurance market remains competitive, certain industries, including healthcare, technology, and life sciences, are experiencing elevated premiums and more restrictive coverage. Underwriters are scrutinizing financials more closely, analyzing board governance, analyzing board governance, such as Cybersecurity & AI policies and frameworks, in addition to any other risk factors. Additionally, event-driven claims, such as those triggered by cybersecurity breaches, AI disclosure incidents such as AI washing, or environmental, social, and governance (ESG) issues, are on the rise. As these risks continue to emerge, insurers are tightening policy terms and conditions.

Industries Most Affected by SCAs

While all public companies face some level of exposure to SCAs, certain industries are particularly vulnerable:

• Consumer Non-Cyclical Sector
  This sector, encompassing essential goods and services such as food, healthcare, and utilities, was the hardest hit, accounting for 67 lawsuits.
  
• Technology
  Driven by AI-related lawsuits, the technology sector saw a significant increase in SCAs, growing from 5-7 cases in 2023 to 15 in 2024.
• Large Market-Cap Companies
  Mega filings—cases involving DDL exceeding $5 billion—reached a record 35 cases in 2024, representing over $1.3 trillion in losses. These lawsuits often target companies with market capitalizations above $100 billion, leading to substantial financial and reputational damage.

How Companies Are Responding

In light of rising SCA risks, companies are reassessing their insurance strategies. A growing number of organizations are engaging in deeper risk analyses, considering:

• Increasing policy limits to better align with growing financial exposures.
• Adjusting policy structures, such as rebalancing ABC coverage and dedicated Side A coverage to ensure leadership protection.
• Exploring alternative risk transfer solutions that provide tailored coverage for their unique risk profiles.

Companies must conduct a thorough limit adequacy exercise, comparing their coverage against industry peers and past claim trends to ensure sufficient protection.

How A Flow Broker Can Help You Navigate These Challenges

Given the complexities of the evolving litigation landscape, partnering with an experienced Flow insurance broker is more critical than ever. Flow brokers provide valuable guidance by:

• Conducting in-depth risk assessments tailored to a company’s industry and financial position.
• Advising on optimal D&O coverage structures to balance cost and protection.
• Keeping clients informed about legal trends, underwriting shifts, and emerging threats such as AI-related lawsuits and cybersecurity risks.
• Assisting in renewal strategy meetings to refine policy terms and ensure alignment with business goals.

Final Thoughts

The surge in securities class action lawsuits poses a growing threat to companies and their leadership teams. While the number of filings may be returning to historical averages, the financial severity of these cases is reaching unprecedented levels. Companies must take proactive steps to assess their risks, optimize their D&O coverage, and work closely with knowledgeable insurance brokers to navigate this challenging landscape.

By staying informed and implementing strategic risk management measures, corporate leaders can better protect themselves and their organizations from the financial and reputational fallout of SCAs in the years ahead.

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References:
Securities Class Action Filings Year in Review‍

Cornerstone Research: Securities Suit Filings Increased in 2024

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