Advisen Analyzes Impact of Shareholder Derivative Suits on Corporate Boards and Their Insurers.

New Brief Finds Suits Connected to Backdated Options and Other Fiduciary Breaches May Not Result in Blockbuster Monetary Settlements, But May Add Up to Major Losses Over Time

NEW YORK -- New shareholder activism, in the form of derivative actions, may pose the next threat to corporate boards and directors and officers liability insurers as the number of suits mounts and defense costs and awards begin to add up to substantive liability insurance claims and personal losses to directors and officers, according to a new brief released today by Advisen Ltd., the leading provider of information, analytics and benchmarking for the commercial insurance industry.

The suits -- which allege boards of directors and company officers are violating fiduciary duties owed to the company and its shareholders, including the recent backdating of stock options for key executives -- are beginning to raise concerns among corporate directors and executives and D&O insurers alike both for their frequency and the growing size of the judgments. Typically, these kinds of cases are brought by activist shareholders looking for changes in management policies and often result in corporate governance changes instead of large monetary rewards. But, the complexity of these cases requires sophisticated legal defenses which alone are costing insurers millions of dollars. And, as the number of these suits grows -- nearly 200 companies are embroiled in backdated stock option probes at present -- the legal fees alone will amount to significant claims, as well as pose a mounting distraction to boards of directors and corporate managers.

Also recent judgments, including last year's $100 million settlement of case against HealthSouth directors and officers and another $200 judgment against AOL Time Warner directors and officers, raise concern that not only will more derivative action suits come to court, but also that the courts appear sympathetic to demands for large monetary settlements.

While the threat of large monetary claims or the persistence of smaller settlements may add up to large losses for insurers, the collective impact of these attacks on corporate governance practices is raising alarms in boardrooms too, as shareholders gain an increasingly powerful voice in how directors and officers run their companies.

For example, some cases may portend shifts in the corporate makeup of foreign companies and allow U.S. litigants to demand more U.S.-styled governance; another example of a non-monetary outcome, but one which could have far-reaching effects on some global companies doing business in the U.S.

"These suits could be a gathering storm for corporate boards and their insurers and require new strategies in mitigating risk," said David Bradford, editor-in-chief at Advisen and author of the brief. "Instead of single cataclysmic events like Enron or MCI shaking the market to its core, these suits could present a slow drip that may gnaw at the D&O market persistently over time and present another governance headache to corporate boards."

The briefing, entitled "Recent Developments in Shareholder Derivative Suits," is available to Advisen subscribers or prospects through their Advisen representative.

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