Securities class action litigation was both up and down in 2005, depending upon how you measure it, but the signs are not good for both directors & officers (D&O) and professional liability (errors & omissions or E&O) insurance underwriters. PriceWaterhouseCoopers has released their 2005 Securities Litigation Study, an excellent summary of securities litigation in the US (see here). Key findings:
- The number of securities cases filed declined 17%, from 203 in 2004 to 168 in 2005
- The average cost of securities litigation increased 156%, from $27.8 million in 2004 to $71.1 million in 2005 (excluding the mega-settlements)
- Total settlement value of all cases settled in 2005 was $17.9 billion (BILLION!), up from $5.5 billion
- CEOs were named in 96% of the cases
- CFOs were named in 82% of the cases
- The Chairman was named in 72% of the cases
PWC attributes the rise in the average value to:
- The lead plaintiff provision of the PSLRA of 1995
- The enormous damages from stock price declines for huge public companies
- The expansion of litigation to include more third parties
The significant increase in total settlement values is driven partly by the mega-settlements such as Enron, and is partly paid for by the directors and officers insurance market. The increasing claims against third parties, such as accountants and attorneys, is being paid for by their professional liability insurers and will impact the professional liability markets for these exposed professions.
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