D&O Plentiful for Tech Cos.
Tech companies have had a tough time in the D&O insurance market in recent years. Their stocks are often subject to speculative investing and share prices can be volatile. As a result, the sector is usually a prime target for shareholder lawsuits. Between 1997 and 2007, the tech sector accounted for about 15 percent of class action litigation filed, according to Cornerstone Research's 2008 review of securities class action filings. The tech bust in 2000-2001 played a big role in that, of course. But by 2008, the tech sector accounted for just 7 percent of litigation filed.
What accounted for that dramatic shift? In spite of the general economic upheaval from last year's financial crisis, there was something of a silver lining in it for the tech sector. With the financial sector imploding, people turned their attention away from tech companies and started suing banks and other financial service companies instead.
Of 210 federal class actions filed in 2008, 103 were filed against the financial services sector and only 15 were against technology companies, according to Cornerstone.
The focus on the financial sector continued in the first half of 2009 as well. Financial companies were defendants in 58 filings or 66.7 percent of the filings in the first half of 2009, an increase from 103 filings or 50 percent in 2008, according to the latest Cornerstone report.
The bottom line is that buyers of tech D&O are getting some very good deals this year, according to one of my experts in the field. Buyers are seeing some discounts on price, but the real advantage is coming on the terms and conditions, where underwriters are willing to give more and better coverage than they have in recent memory.
D&O insurers have been tripping all over each other in their eagerness to write coverage for tech companies, according to Adam McDonough, president and chief executive of Lockton Insurance Brokers LLC in San Francisco. "Capacity is being deployed aggressively in this area," he says. "Things that were in the past impossible to get are now relatively easy to get."
For instance, coverage costs associated with investigations. In the past, insurers would not cover investigations by the Securities and Exchange Commission. Insurers then began to allow coverage, but only for a formal regulatory investigation. Now, in some cases, companies can get coverage even for informal investigations, McDonough tells me.
Another example is something called a hammer clause. The hammer clause says that a company that chooses to pursue a lawsuit when its insurer wants a settlement does so at its own risk. If the company ends up losing the legal battle and the costs are more than what the company could have settled for, the company has to pay the difference. Companies are now able to get those hammer clauses taken out of their contracts, according to McDonough.
Insurers are also now willing to provide nonrescindable contracts. In the past, insurers could rescind an insurance contract if the client had entered into the contract under false pretenses. Now, even though insurers will retain the right not to cover those individuals who were responsible for the misrepresentation, they will sometimes provide coverage for others who were not implicated in the misrepresentation. It's a big change after some tough years where they were the focus of lawsuit activity. Now tech companies can breathe a little easier and reap the benefits.
VOWINKEL, has worked for national media outlets for more than 20 years.
September 1, 2009
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