Fiduciaries for employee benefit plans subject to the Employee Retirement Income Security Act (ERISA) are often concerned about fiduciary liability, as they are personally liable for fiduciary failures, meaning that their personal assets could be at risk. As a practical way of addressing this risk, it is common for fiduciaries to want to understand and focus on the biggest sources of fiduciary liability. While there are many ways to assess this risk, one way is to ask insurance companies providing fiduciary liability insurance coverage about what drives their pricing. Companies providing fiduciary liability insurance are well-informed of the factors that influence fiduciary risk and incorporate that into their pricing.

Understanding what drives pricing is not just about managing those insurance costs, but also about understanding and managing fiduciary risks themselves.

Aon surveyed top insurance companies providing fiduciary liability insurance coverage to understand how plan management typically impacts pricing for fiduciary liability insurance. Our survey focused on areas within the control of fiduciaries, as opposed to other factors such as plan size. For each area, we simply asked insurers to characterize the impact on premiums into three options:

• Significant
• Small
• Nonexistent

Their answers were revealing. Read this report for detailed quantitative results and six key takeaways from the survey.

On April 23, 10am – 10:45am CT we hope you can join Aon’s webinar for a deep dive discussion on our findings, among other key topics.

Register Now

Securities class action filings increased year-over-year for the second consecutive year despite a continued drop in filings under the Securities Act of 1933.¹ In 2024, overall core filing volume increased to 225 – an increase from 2023’s 215. 1933 Act filings fell to 21, likely due to fewer public listings over the past few years.

Key takeaways:

• Artificial intelligence filings increased to 15 in 2024, up from seven in 2023. Of the 15 AI-related filings in 2024, eight were in the technology sector, four were in the communications sector, two were in the industrial sector, and one in the consumer non-cyclical sector.
• Interestingly, COVID-19 related filings continue to be filed, and rose by 36% compared to 2023. However, COVID-19 cases remained below the high of 20 filings from 2022.
• Consumer discretionary, health care, and consumer services were among the industries that suffered the most securities class actions core filings in 2024.
• 1933 Act filings in state court continued to decline following Sciabacucchi and similar decisions on federal forum provisions, with only five 1933 Act filings in 2024 – the lowest since 2013.
• For the second year in a row, the number of core federal filings in the Ninth Circuit exceeded those in the Second Circuit.
• The number of SPAC core filings fell from 27 to 11, from 2023 to 2024.

As 2024 demonstrated, the D&O landscape continues to evolve and be active. Ensuring robust D&O coverage and adequate limits is essential for proper risk mitigation.

If you have any questions about your coverage or are interested in obtaining coverage, please contact your Aon broker.

On Friday, February 21, Bybit, a prominent centralized cryptocurrency exchange, experienced a significant security breach that resulted in the loss of approximately $1.4 billion in Ethereum. While full details are still emerging, initial investigations suggest that the threat actors exploited Bybit’s multisignature cold wallet infrastructure and manipulated the signing interface to approve unauthorized transactions. This attack method aligns with a broader trend in sophisticated social engineering and smart contract manipulation.

This breach marks one of the largest crypto-related security incidents in history, even as Bybit continues work to contain the impact and assess vulnerabilities. It underscores how digital asset custody remains a major concern to the continued growth of crypto markets, particularly for institutional investors, and serves as yet another reminder of the persistent risks that crypto exchanges, Decentralized Finance (DeFi) protocols, and digital asset firms face from highly capable threat actors.

The Bybit breach is the latest in a series of high-profile crypto security incidents that have escalated since 2021, with notable precedents such as:

• Ronin Bridge (2022): Approximately $625 million stolen
• Wormhole (2022): Approximately $325 million stolen
• Nomad Bridge (2022): Approximately $190 million stolen

While cyberattacks have historically spiked alongside Bitcoin price increases, a broader view of contributing factors may contribute to a better understanding of the increased risk. “Crypto bull markets” or times of heightened trading activity, among others, often present new opportunities for threat actors, whether through market speculation, increased user engagement, or a surge in high-value transactions. Additionally, vulnerabilities in algorithmic stablecoins (e.g., TerraUSD) with unstable reserve mechanisms and highly leveraged positions on untested technology, may create further openings for malicious actors.

According to recent reporting from Chainalysis, 2024 saw a 21.07% year-over-year increase in stolen crypto assets, totaling $2.2 billion, with individual hacking incidents rising from 282 in 2023 to 303 in 2024. The Chainalysis report also indicates that hacking activity showed a noticeable slowdown after mid-year, possibly tied to shifting geopolitical factors. However, decentralized finance and bridging platforms remain attractive targets. Given the likely continued volatility in the crypto sector, we anticipate further breaches over the next 12 to 18 months.

On February 26, 2025 Aon hosted its Quarterly Insights Series: Navigating Artificial Intelligence in Chicago.

Aon panelists, plus experienced professionals from IBM, Microsoft and Greenberg Traurig shared insights into the current state of artificial intelligence (AI) risk management and the ability of AI to transform employee talent within organizations. The process to consider AI’s return on investment balanced against the risk landscape emanating from AI was further addressed by discussing risk mitigation strategies, including, in part, the availability of insurance products.

Key takeaways from the discussion:

• AI can drive benefits and productivity in the workplace. The workplace will evolve as optimization potential is realized, which will bring with it an opportunity to reimagine jobs given certain automation potentials.
  
  
• The purpose of AI is to augment – not replace – human intelligence.
  
  
• Opportunity (including “lost opportunity” from not considering AI) comes with risk emanating from contracts, litigation, laws and regulatory uncertainty.
  
  
  • Potential concrete risks include “hallucinations” (responses generated by AI that contains false or misleading information presented as fact), “deepfakes” (highly realistic but fake images, audio and videos), Intellectual property infringement, confidentiality of client information, data security/protection, AI misuses (i.e. lethal weapons/chemicals/infectious diseases), bias/discrimination, and autonomous products (i.e. self-driving cars, robotics, IoT appliances).
    
    
• The balance to get to market while responsibly deploying AI brings challenges, which can be addressed by best available risk management practices.
  
  
• Organizational risk mitigation steps may include taking an AI inventory, modelling frequency and severity of AI risks, establishing an End-to-End Review, Deployment and Audit Process, due diligence of vendors, understanding license terms (including contractual hold harmless and indemnity), and appointing an AI lead, with appropriate stakeholder collaboration, for your company.
  
  
• Some insurance carriers have started to introduce AI specific exclusions, while eight insurers (and climbing) offer AI specific insurance or endorsements. Insurance products such as technology errors and omissions, media liability, intellectual property, property, general liability, crime, product recall, directors and officers, employment practices liability, cyber and others may partially respond to some AI-related claims.
  
  

Change brings risk. As the AI-wave grips the economy and AI utilization increases across business sectors, responsibly deploying this powerful technology with sound risk strategies is of utmost importance.

Further end-stage risk mitigation strategies may include indemnification agreements and insurance products. To ensure maximum protection, it is imperative to have a broker who works with clients to identify and mitigate AI usage risk on a continuous basis, monitors and updates the potential sources of AI claims, identifies existing AI insurance coverage and gaps, and can negotiate best-in-class policy terms and conditions on your behalf across a variety of insurance products. It is possible to establish base AI risk management processes and procedures that grow with AI use.

If you have any questions about your AI coverage or are interested in obtaining AI coverage, please contact your Aon broker.

Watch Replay

The management liability insurance market will continue to evolve in 2025 for all healthcare organizations, from providers to payors. Insures are monitoring how macroeconomic factors and potential changes to federal regulations will impact the operation and performance of their insureds, and the management liability exposures that may intensify as a result.

After years of softness, the insurance market for healthcare organizations is stabilizing in certain pockets due to legacy losses and uncertainty about future exposures. Collaboration and proactive risk management will be paramount for insureds, insurers, and other stakeholders.

Exposures to monitor in 2025:

Evolving federal regulations. Changes to the U.S. healthcare system are already happening. In January, several executive orders reversed initiatives around reviewing Medicare and Medicaid pricing models, strengthening the Affordable Care Act, and managing the deployment of artificial intelligence tools in healthcare. Underwriters will want to understand how healthcare organizations are positioning themselves to comply with federal regulatory changes and withstand any changes to operations and revenue streams that could result.

Pharmaceutical developments. The American pharmaceutical industry is under scrutiny after continued investigation of the three largest PBMs’ pricing models by the Federal Trade Commission. Insurers will watch for any regulatory changes that result from these investigations. The widespread adoption of GLP-1s as covered prescriptions presents another exposure to payors. Expect insurers to scrutinize how health plans are planning for use of these medications by members to impact their profitability, as utilization expectations are still largely unknown.

Antitrust remains a top exposure in healthcare management liability insurance – from industry consolidation via M&A activity leading to more large systems increasing their market power, to the recently-filed MultiPlan Health Insurance Provider Litigation, which names multiple payors as co-defendants in an alleged price-fixing conspiracy.

Insurance market dynamics to consider for an upcoming renewal:

• Some insurers have limited their appetite for large risks ($10B in revenue or larger) and will no longer consider primary placements for healthcare risks. They will look to move into an excess position if currently the primary insurer and manage their capacity down to $5M.
• Though the primary market remains limited for healthcare risks, especially for systems over $1B in revenue, the excess market continues to be competitive with ample capacity.
• Newer insurer entrants struggle to gain market share.

• Expect primary insurers to seek premium increases commensurate with significant changes in exposure. Leading healthcare insurers are seeking rate increases on large risks across their books, driven by legacy loss experiences.
• The excess market remains competitive but anticipate excess pricing to stabilize.

• Coverage in 2025 will likely reflect the ongoing evolution in risk profiles.
• Insurers will continue to adapt their policies to address emerging risks such as antitrust, False Claims Act and other regulatory matters, AI, environmental, social and governance (ESG) and anti-ESG-related exposures.

To manage exposure and prepare an adequate insurance program, be sure to consider how these evolving risks impact your business and the insurance market. Aon also has exclusive access to Cosantoir, a standalone product designed for health systems, tailored to respond to the nuances of enforcement actions arising from alleged Stark, False Claims Act and Anti-Kickback Statute violations, providing coverage for defense costs and settlements.

If you have any questions about your coverage or are interested in obtaining coverage, please contact your Aon broker.

In this edition of the Quarterly Review, we reflect on the SEC’s involvement in artificial intelligence and cybersecurity matters. Our case discussions center on several exclusions often found in management liability policies, including the contract exclusion and the insured v. insured exclusion. We also discuss a recent decision involving board diversity.

The securities class action filings for the fourth quarter are listed and hyperlinked to the Stanford Law School Securities Class Action Clearinghouse database.

The Q4 2024 Legal & Claims Quarterly Review is available here.

Legal & Claims Review Archive

The cryptocurrency industry has witnessed a disturbing trend of high-profile kidnappings targeting its leaders. Last month, the co-founder of Ledger, a leading crypto wallet provider, was kidnapped along with his spouse.¹ The kidnappers demanded a ransom in cryptocurrency, which was later frozen and seized after their rescue. This incident follows another alarming case at the end of last year, where the CEO of WonderFi, a Canadian crypto exchange, was kidnapped and held for a $1 million ransom before being safely released.²

These incidents highlight a growing concern within the industry: criminals are increasingly targeting executives of crypto firms, presuming they have quick access to large amounts of cryptocurrency. This risk becomes even more pronounced when market prices are high, making it imperative for companies to take proactive measures to protect their leaders and employees.

In a more volatile and complex world, serious attention to kidnap for ransom, extortion and threats is required. In addition to there being an uptick in kidnap for ransom cases worldwide, threat cases have been on the rise in the U.S. over the past several years. Every corporation with global operations should consider protecting themselves and their employees by purchasing a kidnap, ransom, and extortion (K&R) policy. The cost of coverage is small compared to the self-insured risk and inability to provide support when required.

The immediate and unlimited access to a vetted crisis response firm is almost more important than the coverage included in a K&R policy. The crisis management consultant’s role is that of an advisor; to provide information, advice, help, and guidance at every stage of an incident. Their primary aim is the safe and timely release of the victim with minimum disruption to other people’s lives and your company’s operations.

Pre-incident prevention training is also vital. Therefore, we negotiate a percentage of the premium that can be reimbursed for pre-incident prevention training with the vetted crisis management firm, which could include threat assessment of executives and other employees, incident management plans, and incident workshops. If you have any questions about your coverage or are interested in obtaining coverage, please contact your Aon broker.

1 - Kidnapped co-founder of French crypto firm Ledger had his hand mutilated | Reuters
2 - Crypto firm WonderFi’s CEO kidnapped then released after paying $1 million ransom: report | The Block

Corporate advance notice provisions, often found in a company’s bylaws, require shareholders to provide advance notice to the corporation if they intend to bring up new business or propose nominees for the board of directors at a shareholders’ meeting. Such provisions balance the need for orderly corporate governance with shareholders’ rights to propose new business or nominate directors. They are designed to prevent ambush tactics where a shareholder might otherwise spring proposals on the company and other shareholders without adequate warning.

In recent years, plaintiffs’ attorneys have sued companies over these advance notice bylaw provisions, alleging that the requirements are too difficult to decipher and overly restrictive to shareholders’ rights. While recognizing that there is a legitimate corporate interest in maintaining advance notice bylaws, the plaintiffs’ bar has challenged specific bylaw wording and practical application of these notice provisions.

For example, plaintiffs have objected to certain bylaw provisions that require the disclosure of individuals “acting in concert” with the nominating shareholder, alleging that such provisions are overbroad and impermissibly allow companies to invalidate stockholder nominations for technical noncompliance. There have also been claims challenging bylaws requiring shareholder nominees to provide the board with irrevocable resignation letters that the board may later accept if it determines that the nominee made untrue statements in connection with the advance notice. Plaintiffs have asserted that such requirements allow the board of directors to usurp stockholders’ exclusive right to select the members of the Board.

Nevertheless, recent decisions in the Delaware courts have generally upheld the validity of advance bylaw provisions. In Paragon¹, the corporation rejected a notice of nomination, and the court found that despite the "nitpicky" and "suspect" nature of certain alleged deficiencies, the nomination notice was invalid because it did not comply with the disclosure requirements of the bylaws.

In Kellner², the court agreed that some of the advance notice bylaws at issue in that case were not valid, stating that the purpose of the provisions was to block a proxy contest rather than enhance transparency or protect stockholder enfranchisement. Nonetheless, the Kellner court still upheld the board’s rejection of the nominees for the corporation’s 2023 annual meeting, finding that they failed to comply with the requirements of the corporation’s valid advance notice bylaws.

Despite resistance from courts, plaintiffs’ attorneys remain actives in this area. The activity may be at least partially driven by Delaware’s so-called “corporate benefit” doctrine, under which a corporation can be ordered to pay a stockholder’s attorney a fee if the stockholder is successful in conferring a benefit to the corporation and its stockholders.

In light of this new wave of advance bylaw litigation, and to avoid costly and/or protracted litigation, companies might consider working with counsel to review their bylaws and determine whether any unclear, unreasonable, indecipherable, or ambiguous provisions warrant modification.

Companies should review their directors’ and officers’ liability insurance policies and consult with their broker to ensure appropriate coverage to respond to these and other shareholder claims. Moreover, before adopting advance notice bylaw provisions, public companies that are under the microscope of proxy advisory firms should consider (1) analyzing their respective investor bases for potential proxy advisory firm influence, and (2) proactively engaging with shareholders—including by discussing the benefits of advance notice provisions and the prevalence of such provisions among industry peers, as applicable—to get out ahead of negative proxy advisory firm scrutiny.

Consult with your broker or Aon’s Executive & Board Advisory Practice for any questions regarding the implications of advance notice provisions. If you have any questions about your coverage or are interested in obtaining coverage, please contact your Aon broker.

1 - Paragon Techs. v. Cryan, C. A. 2023-1013-LWW (Del. Ch. Nov. 30, 2023)
2 - Kellner v. AIM ImmunoTech., 320 A.3d 239 (Del. 2024)

On January 23, the Financial Services Group at Aon hosted an interactive panel discussion in New York. Guest panelists Christopher Brandes, Jennifer Wong, Jordan Saxe, and Joseph Herz shared insights about expectations of initial public offering (IPO) activity in 2025 and beyond, the common organizational, financial, and legal challenges of becoming publicly listed, and the importance of starting a risk management strategy early.

Key takeaways from the discussion:

• An appropriate talent and hiring strategy can be crucial to IPO and post-IPO success. Reporting to the U.S. Securities and Exchange Commission (SEC) is complex and requires an experienced and effective accounting, legal, and audit team. Compliance, financial reporting, and accounting are vital as a company moves closer to a public listing.
• Ensure accuracy of disclosures, such as S-1 filings, and be prepared to meet other compliance requirements from the SEC, such as the cyber disclosure rules.
• Prepare. Becoming a public company requires rigor, timeliness, and complexity in many ways. Consider performing tabletop exercises and hosting mock earnings calls as early as two years before the anticipated IPO window.
• Changes to SEC and environmental, social and governance (ESG) initiatives under the new administration are creating a rapidly evolving risk landscape. Data suggests SEC enforcement/actions could remain active despite the notion of a more lenient administration.
• A risk management strategy that integrates directors & officers (D&O) and cyber insurance can safeguard the company financially and help recruit top talent and board members. No matter how strong your disclosures, a stock drop in your first three years of going public could likely result in a Section 11 lawsuit, and cyber incidents continue to rise in frequency. Insufficient budgeting for insurance can also be an issue, so start discussions with your broker early.

The D&O insurance market is constantly evolving and has been more buyer-friendly over the past few years. A broker who understands the market and can negotiate best-in-class policy terms and conditions on your behalf is important in the unfortunate event of a claim. As the IPO market starts to build momentum, Aon can help clients make better decisions and prepare for what comes with a liquidity event. If you are a director or executive planning an IPO, read these five D&O tips and actions to take now in our latest article.

If you have any questions about your coverage or are interested in obtaining coverage, please contact your Aon broker.

Average Price Per Million decreased 10.6 Percent in the Fourth Quarter 2024 compared to the Fourth Quarter 2023

Average Change for Primary Policies with Same Limit and Same Deductible decreased 3.5 percent

Fourth Quarter Key Metrics and Highlights

• Average price per million decreased 10.6 percent compared to the prior-year quarter.
• Price per million for clients that renewed in both Q4 2024 and Q4 2023 decreased 4.3 percent.
• 60 percent of primary policies renewing with the same limit and deductible experienced a price decrease; 11 percent had a price increase.
• Overall price change for primary policies renewing with same limit and deductible was down 3.5 percent.
• 95 percent of primary policies renewed with the same limit.
• 91 percent of primary policies renewed with the same deductible.
• 88 percent of primary policies renewed with the same limit and deductible.
• 97 percent of primary policies renewed with the same carrier.

On February 3rd, 2025, Aon Commercial Risk Solutions (U.S.) reported public Directors’ & Officers’ (“D&O”) liability pricing for the three months ended December 31, 2024.

Each quarter, Aon’s Financial Services Group (“FSG”) publishes a pricing index of D&O insurance that tracks premium changes relative to the base year of 2001.

The Pricing Index decreased to 1.26 from 1.41 in the prior-year quarter, the eleventh quarterly decrease since Q4 2017. The average cost of $1 million in limits decreased 10.6 percent compared to the prior-year quarter.

The FSG D&O Pricing Index for Q4 2024 is available here (registration required).

The Professional Liability Underwriting Society (PLUS) held its 37th annual conference in Chicago, Illinois, from November 13-15, 2024.

The PLUS conference is the premier event for management and professional liability professionals and a great opportunity to hear from industry leaders, build new connections, and learn innovative solutions. The conference was a success and well-attended, with just under 1200 attendees, and presented a wide variety of content and information.

The impact of new ideas and innovations on the industry and the importance of being adaptable in a constantly changing and volatile world were key themes of the conference.

Aon’s CEO, Greg Case, discussed, among other things, how four megatrends, trade, technology, weather and workforce, will shape the future of business and the insurance industry.

Financial Services Group professionals Nick Reider, Adam Furmansky, Kary Trocchia, and Jay Desjardins discussed trends and themes in management and professional liability in various speaking sessions:

• Noting that artificial intelligence (AI), large derivative settlements, and securities claims trends will continue to be points of discussion for clients and insurers.
  
  
• Having nuanced discussions exploring the risk of AI adoption and usage and the impact AI is having on claims trends.
  
  
• Examining how AI is used as an opportunity to foster growth and propel industries forward, as well the evolving regulatory landscape in the U.S. and the EU AI Act’s compliance requirements.
  
  
• Discussing the latest developments in fiduciary liability, addressing emerging ERISA risks and plaintiffs’ new theories in prudence and excessive fee litigation, including 401(k)/403(b) plan litigation and health plan fee litigation.
  
  

PLUS events are a great opportunity to network, learn new solutions and learn about upcoming trends within management and professional liability. We look forward to upcoming PLUS events and hope you can join us for the symposium series in New York City on March 3rd, 4th, 5th, and 24th, 2025, featuring the latest trends in Employment Practices Liability, Cyber, D&O, and Transactional Risk.

Another year, another record-setting amount recovered by the U.S. Securities and Exchange Commission’s (SEC) Division of Enforcement (Enforcement).

The SEC recently closed its fiscal year 2024 with Enforcement recovering $8.2 billion in financial remedies, far and away Enforcement’s largest recovery in any fiscal year. Enforcement reached this milestone on the heels of recovering $6.4 billion and $4.9 billion in fiscal years 2022 and 2023, respectively. Previously, the highest and second highest amounts recovered in any fiscal year in the SEC’s history.¹

What is more, Enforcement notched its new record-setting amount recovered in 2024 while bringing only 583 enforcement actions, far fewer than the 760 and 784 enforcement actions that the SEC brought in 2022 and 2023, respectively. Part of the explanation is that approximately $4.5 billion of the $8.2 billion recovered in 2024 came from a single jury trial. Regardless, when considering these statistics, directors and officers (D&O) insureds should note two important points:

First, in the press release announcing Enforcement’s FY 2024 results, Acting Director of Enforcement Sanjay Wadhwa cited Enforcement’s “countless investigations” that did not result in enforcement actions and thus that the SEC’s FY 2024 “numbers do not reflect.” In other words, Enforcement has been even more active in investigating potential malfeasance than the lawsuit filings alone might suggest.

Second, while some commentators believe that the SEC will become less active and more laissez-faire under President Trump, the data actually belies that suggestion. Indeed, the enforcement action statistics over the past few years under President Biden pale in comparison to Enforcement’s 821 enforcement actions in FY 2018 and 862 enforcement actions in FY 2019—during the last Trump administration. That, coupled with the fact that Enforcement received 45,130 tips, complaints, and referrals in FY 2024—the most ever received in a single year—provide good reason to expect Enforcement to remain as active as ever, regardless of the impending administration change.

Given the SEC’s robust enforcement activity, companies with SEC exposure and their respective D&Os should carefully consider and regularly audit the contours of their D&O liability insurance coverage. Chief among such considerations, at least for public companies, is whether to purchase coverage for the costs that the company incurs in its own right in responding to SEC and other securities investigations—something not traditionally covered on public D&O policies, but now becoming more widely available in various permutations, usually for an additional premium. Another consideration for public companies and their D&Os is who qualifies as an “Insured Person,” the definition of which generally is narrower in public company D&O forms than in private company forms. Equally important is the scope of the “Loss” definition—and whether and to what extent fines and penalties are included, something which (again) varies from form to form. An experienced broker can help navigate these and other important considerations.

If you have any questions about your coverage or are interested in obtaining coverage, please contact your Aon broker.

1 SEC.gov | SEC Announces Enforcement Results for Fiscal Year 2024

The Legal & Claims practice within the Financial Services Group at Aon has published the Q3 2024 Quarterly Review.

In this issue, artificial intelligence features prominently, both in private litigation and SEC enforcement actions. In case developments, we discuss the United States Supreme Court’s recent division which overturned the long-standing Chevron doctrine. We also review insurance related cases on the definition of claim, capacity of individuals and indemnification, as well as the concepts of arbitration and restitution.

The Q3 2024 Legal & Claims Quarterly Review is available here.

Legal & Claims Review Archive

It was headline news when, in October 2023, the U.S. Securities and Exchange Commission (SEC) brought a civil enforcement action against an IT software vendor and its top information security officer arising out of a data breach at that vendor. Now, the SEC has trained its sights on four of the vendor’s corporate customers, charging each of them with making materially misleading disclosures after their own IT systems were compromised by virtue of the vendor data breach. These four companies, all IT services and software providers, have agreed to pay civil penalties ranging from $990,000 to $4 million. This recent wave of SEC charges is the first to emerge out of the Commission’s investigation into the adequacy of public disclosures made by downstream victims of the data breach in question.

Although each of these four companies made relevant cyber-related disclosures – indeed, some even disclosed the data breach on Form 8-K – the SEC nonetheless found their disclosures inadequate and misleading in violation of the Securities Act of 1933, the Securities Exchange Act of 1934 (’34 Act), and related rules thereunder. The SEC further found that one of the companies in question also violated certain disclosure controls and procedures provisions of the ’34 Act and rules thereunder.

Seemingly acknowledging industry sentiment that companies affected by data breaches are victims, not villains, Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement, said in the SEC’s press release describing the charges: “[W]hile public companies may become targets of cyberattacks, it is incumbent upon them to not further victimize their shareholders or other members of the investing public by providing misleading disclosures about the cybersecurity incidents they have encountered.”

These charges reflect the SEC’s continued focus on public companies’ cybersecurity disclosures following its issuance of cybersecurity-specific disclosure rules last year and its enforcement activity since then.

The good news for public company insureds is that, whereas D&O policies traditionally have not covered public companies for costs they incur in their own right in responding to SEC investigations, many D&O insurance carriers are now offering so-called “entity investigation” coverage for public companies, usually for an additional premium. The terms and conditions of entity investigation coverage can differ – some require a concurrent related securities claim, some retroactively cover investigation costs in the event of a related claim, and still others do not require any related claim – but generally the coverage is reserved for government securities-related investigations of the entity. Public company insureds concerned about the potentially substantial expense of responding to such an investigation should consider purchasing this increasingly common coverage.

If you have any questions about your coverage or are interested in obtaining coverage, please contact your Aon broker.

Aon joined digital asset and crypto industry leaders to launch the Node Operator Risk Standards (NORS) certification, setting a new benchmark for operational security and risk management in the Ethereum ecosystem. NORS is the world’s first formal certification to attest to staking risk management.

The NORS certification means financial institutions can rely on a trusted, third-party verified standard for Ethereum, thereby simplifying the due diligence process. It represents rigorous, enterprise-grade standards and controls that cover critical aspects of node operation, including slashing prevention, validator diversity, responsible private key management, and overall operational security. Achieving NORS certification is a testament to a node operator’s commitment to responsible validator management and best practices, providing a competitive edge to differentiate as a provider. Node operation standards like NORS are key to ensure resilient validator infrastructure that evolves with the staking landscape, future-proofing your business and the ecosystem.

Read the NORS press release for more information.

The Securities and Exchange Commission (SEC) recently announced an increased scrutiny around artificial intelligence (AI) washing, including a focus on AI disclosures related to financial institutions.

On October 21, 2024, the SEC Division of Examinations published its exam priorities for the 2025 fiscal year. Not surprisingly, AI is expected to receive heightened attention.

In relation to investment advisers, the priority list includes, in part, a focus on “AI integrat[ion] into the advisory operations, evaluating disclosures related to AI.” In fact, SEC Chairman Gensler, in September 2024, directed advisers not to mislead the public through “AI washing.” He warned that “(s)uch AI washing, whether it’s by companies raising money or by financial intermediaries like investment advisers and broker dealers, may violate the securities laws.”

The SEC announcement echoes similar messaging from other financial regulatory bodies around the implementation of the emerging technology. The concern of the regulators emphasizes the potential exposure of directors & officers in exercising their fiduciary duties with respect to AI, including the oversight of underlying algorithms and their potential discrimination, and the overall systemic risk associated with the implementation of AI.

Directors’ & officers’ (D&O) insurance is one tool that can help organizations and their D&Os mitigate exposures related to emerging technologies. Companies using AI should regularly review their D&O policies and consider seeking AI-specific coverage enhancements, alongside other policy enhancements tied to notable risk factors.

Watch our webinar or review our Directors and Officers Guide to Navigating AI-Related Risks to learn more on evolving risks related to AI, the regulatory landscape, and governance and oversight processes with respect to implementing generative AI.

Consult with your Aon broker for any questions regarding the implications of emerging AI exposures and your D&O insurance. If you have any questions about your coverage or are interested in obtaining coverage, please contact your Aon broker.

Directors and officers (D&Os) of public companies and private and nonprofit organizations face significant liability risks. Shareholder derivative actions, insolvency risk, and the regulatory actions underscore the need to implement strong risk management strategies and robust D&O insurance programs.

As fiduciaries required to act in their organizations’ best interests, D&Os can be held liable for misconduct that allegedly harmed the organization. Indemnification of settlements is usually prohibited in shareholder derivative lawsuits, in which plaintiffs sue D&Os on behalf of the organization. An insolvent company is also unable to indemnify its D&Os, and the number of large corporate entities filing for bankruptcy protection so far in 2024 has increased. Both insolvency and shareholder derivative lawsuit risks underscore the importance of dedicated Side A coverage.

Regulatory authorities have also been more active in policing misconduct among public and private firms.

Learn more in this Business Insurance Risk Perspective from Aon.

Average Price Per Million decreased 11.1 Percent in the Third Quarter 2024 compared to the Third Quarter 2023

Average Change for Primary Policies with Same Limit and Same Deductible decreased 6.0 percent

Third Quarter Key Metrics and Highlights

• Average price per million decreased 11.1 percent compared to the prior-year quarter.
• Price per million for clients that renewed in both Q3 2024 and Q3 2023 decreased 7 percent.
• 65 percent of primary policies renewing with the same limit and deductible experienced a price decrease; 8 percent had a price increase.
• Overall price change for primary policies renewing with same limit and deductible was down 6 percent.
• 99 percent of primary policies renewed with the same limit.
• 82 percent of primary policies renewed with the same deductible.
• 81 percent of primary policies renewed with the same limit and deductible.
• 94 percent of primary policies renewed with the same carrier.

On October 28th, Aon Commercial Risk Solutions (U.S.) reported the public Directors’ & Officers’ (D&O) liability pricing for the three months ended September 30, 2024.

Each quarter, Aon’s Financial Services Group publishes a pricing index of D&O insurance that tracks premium changes relative to the base year of 2001.

The Pricing Index decreased to 1.12 from 1.26 in the prior-year quarter, the ninth quarterly decrease since Q4 2017. The average cost of $1 million in limits decreased 11.1 percent compared to the prior-year quarter.

The FSG D&O Pricing Index for Q3 2024 is available here (registration required).

On October 15th, 2024, Nick Reider, Amy Jennings, and Brian Lichter joined guest thought leaders, Dominique Shelton Leipzig and Avi Gesser, for a discussion around evolving risks related to artificial intelligence.

Key Takeaways:

• An overview of the evolving artificial intelligence regulatory landscape in Europe and the US
• Governance and oversight processes with respect to implementing artificial intelligence
• Risks and exposures for directors and officers with respect to artificial intelligence

Watch the webinar

On September 24th, 2024, Nick Reider, Laura Wanlass, and Shruti Engstrom joined guest speaker from Goodwin Procter, Jonathan Hecht, for a discussion around cyber governance in part two of Aon’s Cyber and D&O webinar series.

Key Takeaways:

• The role of insurance in cybersecurity risk mitigation strategies for all organizations
• Key learnings and takeaways from recent cyber-related disclosure trends
• How to best navigate the requirement of increased transparency (from the SEC or institutional investors) on the impact of cyber events
• Best practices to operationalize and implement a cyber governance strategy
• Best practices for working with legal counsel and an overview of cyber-related litigation trends

Watch the webinar

Aon’s Nick Reider, Brian Lichter and Amy Jennings are joined by guest panelists Dominique Shelton Leipzig from Mayer Brown and Avi Gesser from Debevoise & Plimpton, for insight into evolving risks related to artificial intelligence (AI).

Key takeaways from this session will include:

• An overview of the evolving AI regulatory landscape in Europe and the US
• Governance and oversight processes with respect to implementing AI
• Risks and exposures for directors and officers with respect to AI

Register Now

The Legal & Claims practice within the Financial Services Group at Aon has published the Q2 2024 Quarterly Review.

In this issue, we note that the United States Supreme Court agreed to hear a securities class action case that involves alleged misstatements about a technology company’s data. We also discuss artificial intelligence (AI) litigation trends, specifically relating to “AI-washing”. We review several case decisions on what constitutes a “claim” or “wrongful act” and discuss cases interpreting several key exclusions found in management liability policies, such as the prior acts exclusion and the contract exclusion.

The Q2 2024 Legal & Claims Quarterly Review is available here.

Legal & Claims Review Archive

Aon’s Third Quarter 2024 Employment Practices Liability (EPL) Advisor includes insights on notable court cases and employment practices risk issues, focusing on legal trends and law changes, the evolving insurance marketplace, and claims examples.

EPL/W&H advisor archive

Join us for part two of Aon’s Cyber and D&O webinar series! Aon’s Shruti Engstrom, Laura Wanlass, and Nick Reider join guest speaker from Goodwin Procter, Jonathan Hecht, for a discussion around practical points and pitfalls in cyber governance against the backdrop of increasingly sophisticated threat actors, new cyber disclosure requirements, and heightened scrutiny from regulators, shareholders, consumers, and others.

Session topics will include:

• Best practices and pitfalls regarding cyber governance policies and procedures
• Board and senior management oversight of cyber risks
• Transparency around cybersecurity, including with respect to cyber event notifications and required cyber disclosures
• Key learnings and trends gleaned from initial disclosures under the SEC’s new cyber regime

Directors’ & officers’ (D&O) liability is a foundational risk for publicly traded companies because they face exposure to equity market volatility, adverse litigation trends, and an evolving regulatory environment.

D&O insurance is necessary to protect the corporate entity and the personal assets of its top executives and board members. As the public D&O insurance landscape evolves it is vital that renewal discussions go beyond expected loss and include the scope of potential risk.

Aon’s D&O Risk Analyzer helps brokers guide public companies as they discuss how this crucial coverage integrates into their strategic risk management and into optimizing capital.

Using real-time data and insights, such as insurance program structures, stock drop analysis, and total cost of risk analysis, the D&O Risk Analyzer simulates probabilistic exposures and loss scenarios so brokers can test multiple insurance options and present clients the ones that fit their risk tolerance and appetite.

The D&O Risk Analyzer helps our brokers to inform and advise clients, so they can make better decisions that protect their business and leadership.

Aon will continue to deliver enhancements and new features to the D&O Analyzer to better serve our clients.

If you have questions or are interested in obtaining coverage, please contact your Aon broker.

In July 2024, California-based gig economy companies prevailed when Proposition 22 was upheld by the California Supreme Court. The court determined that Proposition 22 does not wrongly curtail the legislature’s power over worker protections by categorizing workers as independent contractors instead of as employees. The Proposition was created in 2020 for app-based drivers who are defined as workers who (a) provide delivery services on an on-demand basis through a business’s online-enabled application or platform; or (b) use a personal vehicle to prove prearranged transportation services for compensation via a business’s online-enabled application or platform.

In addition to mandating classification, Proposition 22 also enacted labor and wage laws as follows:

• Payments for the difference between net earnings, excluding tips, and a net earnings floor based on 120% of the state minimum wage for hours worked plus 30 cents per engaged mile, adjusted for inflation after 2021;
  
  
• Limiting app-based drivers from working more than 12 hours during a 24-hour period, unless the driver has been logged off for an uninterrupted 6 hours;
  
  
• For drivers who average at least 25 hours per week of engaged time during a calendar quarter, require companies to provide healthcare subsidies equal to 82% the average California Covered (CC) premium for each month;
  
  
• For drivers who average between 15 and 25 hours per week of engaged time during a calendar quarter, require companies to provide healthcare subsidies equal to 41% the average CC premium for each month;
  
  
• Require companies to provide or make available occupational accident insurance to cover at least $1 million in medical expenses and lost income resulting from injuries suffered while a driver was online (defined as when the driver is using the app and can receive service requests) but not engaged in personal activities;
  
  
• Require the occupational accident insurance to provide disability payments of 66% of the driver’s weekly average earnings during the previous 4 weeks before the injuries suffered (while the driver was offline but not engaged in personal activities) for upwards of 104 weeks (about 2 years);
  
  
• Require companies to provide or make available accidental death insurance for the benefit of a driver’s spouse, children, or other dependents when the driver dies while using the app;
  
  
• Require companies to develop anti-discrimination and sexual harassment policies; training programs for drivers related to driving, traffic, accident avoidance, and recognizing and reporting sexual assault and misconduct; have zero-tolerance policies for driving under the influence of drugs or alcohol; require criminal background checks for drivers.
  
  

Gig economy companies contributed over $200M in a multiyear fight to preserve Proposition 22. Had Proposition 22 not been upheld, companies employing gig workers could have faced significant additional costs to pay drivers as employees, passing increased costs to the consumer/passengers.

While the issue seems to be currently settled in California, other states and cities are attempting to institute legislation regarding app-based gig workers and their classifications. Companies in the gig economy should regularly engage with their legal teams or preferred counsel to remain in compliance in the locations that they operate.

In a much-anticipated ruling likely to have dramatic ripple effects across government agencies, the U.S. Supreme Court held in SEC v. Jarkesy that the U.S. Constitution’s Seventh Amendment forbids the SEC from pursuing civil money penalties in administrative proceedings before administrative law judges (ALJs). Consequently, the SEC now may bring such actions only in federal court, where federal judges preside over the proceedings and juries are the fact-finders.

With respect to cases brought by the SEC, many commentators agree that the decision will have a significant impact. After all, the SEC’s success rate before its in-house ALJs has been approximately 90%— substantially more favorable than the SEC’s 69% win-rate in federal court, where defendants have greater protections, such as third-party subpoena power and more demanding evidentiary rules.¹

SEC actions aside, Jarkesy may also have similar significant implications for other types of administrative enforcement actions, such as those brought by bank regulators, which commentators agree have been similarly favorable for federal agencies.

Because the SEC still can sue companies and their directors and officers (D&Os) in federal court, Jarkesy likely does not materially diminish companies’ and D&Os’ exposure to SEC enforcement actions. That said, the Jarkesy decision warrants careful review of D&O liability insurance policies, particularly to ensure that such policies’ definitions of “Securities Claim” are robust, without restrictions tied to administrative actions that the primary U.S. securities regulator now is barred from bringing. An experienced broker can help optimize coverage terms and conditions. If you have any questions or are interested in obtaining coverage, please contact your Aon broker.

1 SEC Wins With In-House Judges - WSJ

Aon discusses evolving D&O and cyber claims trends, the interplay between D&O and cyber liability policies, and risk management best practices in a July 25, 2024 webinar.

Key Takeaways:

• An overview of the global IT outage and the potential impact on organizations
• Implications of a recent court decision involving the SEC’s enforcement action of a corporation and its CISO
• A clear understanding of evolving claims trends facing security professionals, particularly CISOs
• Best practices to maximize value from your cyber insurance policy and D&O policy, optimizing policy performance in a claim scenario
• Interplay between D&O and Cyber liability policies, and what the CISO needs for coverage
• Clear and concise risk management best practices moving forward

Watch the webinar

Average Price Per Million decreased 5.2 Percent in the Second Quarter 2024 compared to the Second Quarter 2023

Average Change for Primary Policies with Same Limit and Same Deductible decreased 6.5 percent

Second Quarter Key Metrics and Highlights

• Average price per million decreased 5.2 percent compared to the prior-year quarter.
• Price per million for clients that renewed in both Q2 2024 and Q2 2023 decreased 6.2 percent.
• 68 percent of primary policies renewing with the same limit and deductible experienced a price decrease; 11 percent had a price increase.
• Overall price change for primary policies renewing with same limit and deductible was down 6.5 percent.
• 96 percent of primary policies renewed with the same limit.
• 90 percent of primary policies renewed with the same deductible.
• 86.5 percent of primary policies renewed with the same limit and deductible.
• 86 percent of primary policies renewed with the same carrier.

On July 29th, Aon Commercial Risk Solutions (U.S.) reported the public Directors’ & Officers’ (D&O) liability pricing for the three months ended June 30, 2024.

Each quarter, Aon’s Financial Services Group publishes a pricing index of D&O insurance that tracks premium changes relative to the base year of 2001.

The Pricing Index decreased to 1.09 from 1.15 in the prior-year quarter, the ninth quarterly decrease since Q4 2017. The average cost of $1 million in limits decreased 5.2 percent compared to the prior-year quarter.

The FSG D&O Pricing Index for Q2 2024 is available here (registration required).

Read the alert here.

Cyber Attacks or Data Breaches are the number one risk facing organizations globally and are predicted to remain in this position in 2026, according to Aon’s Global Risk Management Survey. It is crucial to have a clear grasp of how directors’ & officers’ (D&O) liability policies may respond in the event of a cyber incident, including potential coverage limitations, and how a D&O policy differs from a cyber liability policy. It is also imperative to understand how a CISO is protected under one or both policies.

Featured guest speaker Andy Moss, Partner at Reed Smith’s Insurance Recovery Group, Nick Reider and Shruti Engstrom, Aon’s D&O and Cyber thought leaders, and moderator Samantha Billy, Aon’s U.S. Cyber Broking Growth leader, invite you to a discussion on evolving claims trends, the interplay between D&O and Cyber liability policies, and risk management best practices for your organization.

Panelists will answer common concerns including:

• Potential implications of a cyber incident for D&Os & CISOs
• What is the overlap of or interplay between D&O and cyber policies
• How much coverage, or what type of coverage is required for each policy
• How D&O and cyber policies work together to protect the CISO
• Risk Management best practices to increase protection, and reduce costs

Register for the webinar here.

The Financial Services Group at Aon’s Alexis Elman, Vice President, and Emily Snyder, Senior Vice President, co-presented with Martha Jacobs, Aon’s National Healthcare Practice Leader at the PLUS Healthcare and MedPL Symposium on the intersection of directors and officers liability, managed care errors and omissions, general liability, and medical professional liability exposures.

The discussion focused on allegations that could impact multiple policies, such as unnecessary medical care, failure to supervise, care management, non-employment harassment and discrimination, violations of civil rights, fraudulent billing practices, and antitrust. Claim scenarios provided insight into potential gaps in coverage due to the ways the policies treat provisions such as other insurance, stacking of limits, defense and consent to settle, retentions, and exclusions meant to push claims to other policies. The audience of brokers and underwriters were receptive to Aon’s message that insurance contracts perform as intended when the policies are robust.

Aon continues to innovate to address emerging risks not adequately covered by current insurance solutions. For example, regulatory enforcement actions continue to create a significant liability for healthcare organizations, but many traditional insurance policies do not offer a robust risk transfer solution for such actions. In response Aon launched Cosantoir, a standalone product tailored to respond to the nuances of enforcement actions arising from alleged Stark, False Claims Act and Anti-Kickback Statute violations, providing coverage for defense costs and settlements.

Aon looks forward to discussing these issues and other complexities of commercial risk in healthcare with clients and industry leaders at the upcoming Midwest Region Healthcare Symposium in Chicago, IL on July 22 & 23, 2024. Healthcare organizations can register for the event here.

The ability to fill gaps in coverage is the most alluring, yet also most mysterious, characteristic of Side A Difference in Conditions (DIC) coverage. Having earned the moniker of “sleep insurance,” Side A DIC is said to allow directors and officers (D&Os) to sleep at night knowing their personal assets will be better protected by insurance – even if the underlying D&O insurance program has been exhausted or will not respond to the claim.

Coverage

Side A DIC provides coverage outside of the Side ABC limits on a D&O tower and only protects D&Os’ personal assets. The underlying Side ABC limits resolve to do the following: provide coverage for D&Os when the entity cannot or will not indemnify (Side A); reimburse the company for indemnifying D&Os (Side B); and pay claims made against the entity (Side C). Side A DIC, meanwhile, both provides excess Side A coverage and will drop down to fill any gaps, when the underlying insurers either cannot or will not respond to a claim against a D&O.

Notably, a Side A DIC policy does not follow form with the other three main coverage parts; it includes broader policy language and fewer exclusions. Typically, a Side A DIC policy only includes one exclusion – that of Conduct/Fraud. Side A DIC has no deductible or retention, and therefore will pay from dollar one for claims made against D&Os.

Triggers

One of the most common Side A DIC triggers is when an entity has filed for bankruptcy. Unlike the Side ABC policies, the Side A DIC does not provide coverage to the entity and therefore cannot be held as an asset of a bankruptcy estate. With the Side ABC policies being, at times, argued to be assets of the bankruptcy estate, Side A DIC should provide more readily available coverage against D&Os in the bankruptcy context.

Other common events that trigger Side A DIC include: exhaustion of underlying limits, the underlying Side A carrier declining coverage due to policy restrictions (e.g., an “insured vs. insured” exclusion), or an underlying carrier attempting to rescind coverage.

Side A DIC provides an important safety net that can help entities attract and retain corporate executives and board members. It provides broader protection for D&Os’ personal assets in the event an insurer refuses to pay a Side A claim. In the high-stakes world of D&O claims, Side A DIC coverage serves to fill in the gaps, allowing D&Os to have peace of mind. If you have questions or are interested in coverage, please contact your Aon broker.

The Legal & Claims practice within the Financial Services Group at Aon has published the Q1 2024 Quarterly Review. In this issue, we discuss the 2023 securities class action filing trends and one of the first artificial intelligence-related securities suits filed. Our cases of interest cover topics such as the claim definition, interrelated claims, fraudulent transfer and various exclusion found in management liability policies.

The Q1 2024 Legal & Claims Quarterly Review is available here.

Legal & Claims Review Archive

Commonly, the announcement of a public company merger can invite shareholder litigation that challenges the acquired company’s disclosures under Section 14(a) of the Securities and Exchange Act of 1934. In these “merger objection” suits, the defendant company will make additional disclosures, and then plaintiffs’ lawyers will agree to dismiss the suits in exchange for payment of a so-called “mootness fee.”

It was eight years ago that the Seventh Circuit of the United States Court of Appeals chastised such suits, remarking that litigation “that yields fees for class counsel and nothing for the class is no better than a racket. It must end.”¹ Now in 2024, the Seventh Circuit has again made statements highly critical of such litigation in Alcarez v. Akorn, Inc., 2024 U.S. App. LEXIS 9070 (7th Cir. 2024).

In Alcarez, the plaintiffs in the underlying lawsuits sued Akorn and its board of directors in connection with a proposed merger, seeking additional disclosure regarding the transaction. After proxy revisions, plaintiffs dismissed their lawsuits in exchange for a mootness fee. An Akorn shareholder moved to intervene and object to the fee on unjust enrichment grounds and to have the mootness fee disgorged back to Akorn. After rejecting the shareholders’ attempts to intervene, the district court ordered the return of the mootness fee based on the court’s “inherent authority.”

On appeal, the Seventh Circuit found that the shareholder should have been permitted to intervene. Further, while not directly contradicting the district court’s ultimate decision to order the return of the fee award – the Seventh Circuit explained that under the Private Securities Litigation Reform Act, the voluntary dismissal of each suit was a “final adjudication of the action,” and therefore, the district court was obligated to “determine whether each suit was proper” under Rule 11(b) (which prohibits the filing of a lawsuit for improper purposes, including needlessly increasing the cost of litigation)² “at the moment it was filed.” The Seventh Circuit “agree[d] with the district judge’s analysis,” which in substance had found that the complaints violated Rule 11(b). The Seventh Circuit, in remanding the action to the district court, explained, “(b)ecause Rule 11(c)(4) gives the district judge discretion over the choice of sanction, the court would be entitled to direct counsel who should not have sued at all to surrender the money they extracted from Akorn.”

While it remains to be seen if the Seventh Circuit’s highly critical decision slows down the tide of mootness fee claims, it is important to ensure that a company’s directors and officers insurance policy contains broad coverage and obtains coverage for mootness fee, where available. If you have questions or are interested in obtaining coverage, please contact your Aon broker.

1 - In re Walgreen Co. Stockholder Litigation, 832 F.3d 718, 724 (7th Cir. 2016)
2 - Federal Rules of Civil Procedure §11(b)

Intellectual property disputes can result in a D&O claim and increase personal exposure for directors and officers (D&Os). Organizations should take proactive steps to manage and mitigate their intellectual property risks.

Key takeaways:

• IP litigation is on the rise.
• For companies that are less mature and perhaps in the growth stage or seeking to go public, IP litigation can have a disproportionate impact on their financial position.
• For D&Os, the connection between IP risk and a claim on their D&O policy must alert them to mitigate any potential IP risk.

Read more at How an IP litigation could turn into a D&O problem.

The U.S. Supreme Court resolved a split among federal appellate courts by ruling that a company’s “pure omission” of information required to be disclosed under Item 303 of SEC Regulation S-K—that is, complete silence, as opposed to affirmative half-truths—cannot support a private plaintiff’s claim under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5(b) thereunder.¹

The decision is notable because it definitively bars plaintiffs from pursuing claims based on a companies’ “pure omission”-based Rule 10b-5(b) claims, but leading defense-side and plaintiff-side securities litigation firms generally agree that Macquarie is unlikely to alter the legal landscape for issuers and their directors and officers (D&Os), underscoring the continued the importance of insureds maintaining robust D&O liability insurance programs.

Background and Decision

Item 303 requires companies to disclose in their periodic SEC filings any known trends or uncertainties that are reasonably likely to have a material impact on the company’s financial condition and results of operations. Rule 10b-5(b), in turn, prohibits, in the securities transaction context, making untrue statements of material fact (i.e., affirmative false statements) and omitting material facts necessary to render statements made not misleading (i.e., affirmative half-truths). Plaintiffs in Macquarie did not identify any affirmative false statement or half-truth. Instead, plaintiffs asserted that Item 303 required the defendant to disclose that a regulation capping the sulfur content of oil would dramatically impact the defendant’s fuel storage business, and that the defendant violated Rule 10b-5(b) by omitting this information. In rejecting this theory and reversing the U.S. Second Circuit Court of Appeals’ contrary conclusion, the Supreme Court held that Rule 10b-5(b) requires either an affirmative false statement or a misleading half-truth, and that Rule 10b-5(b) cannot be satisfied by a pure omission alone.

Anticipated Impact of the Decision

Leading litigation firms from both sides of the proverbial “v” agree that Macquarie likely will not fundamentally reform securities litigation. For one thing, the Supreme Court left open the question of whether pure omissions—a rare theory of liability to begin with—can support claims under provisions of Rule 10b-5 other than subsection (b). Moreover, as the Supreme Court acknowledged, notwithstanding the Macquarie decision, the SEC can still investigate and bring enforcement actions concerning Item 303 violations, and private plaintiffs can still bring pure omission-based claims under other securities laws—most notably, Section 11 of the Securities Act of 1933. Perhaps most fundamentally, plaintiffs still can satisfy Rule 10b-5(b) by identifying affirmative statements rendered misleading by a given omission, which plaintiffs had been required to do under decisions from multiple federal circuit courts of appeals (other than the Second Circuit), even before Macquarie was decided.

Because Macquarie is unlikely to dissuade plaintiffs from pursuing securities claims, insureds should continue maintaining and regularly auditing robust D&O programs to cover the company and its D&Os in the event of a securities lawsuit. An experienced broker can help optimize coverage terms and conditions. If you have any questions or are interested in obtaining coverage, please contact your Aon broker.

1 Macquarie Infrastructure Corp. v. Moab Partners, L. P., 601 U.S. ___ (2024)

In April 2024, by a vote of 3-2, the Federal Trade Commission (FTC) issued its final noncompete rule, banning employers from using such agreements in the workplace. By FTC’s broad definition a noncompete is “any contractual provision or workplace policy that has the effect of prohibiting the worker, penalizing a worker for, or functions to prevent a worker from seeking or accepting employment from a person or operating a business after the conclusion of the worker’s employment with the employer.”

In addition to banning new noncompete agreements, existing ones will not be enforceable after the effective date of the updated rule, with limited exceptions. Noncompete agreements not subject to the updated rule include preexisting ones with “senior executives” in a policy-making position and earning over $151,164 annually, sellers in a bona fide sale of a business entity and causes of action related to a noncompete clause accruing prior to the effective date. Notice that a noncompete agreement will become unenforceable must be given on paper, delivered by hand, mail, email or text message to all relevant workers.

Two legal challenges have already been filed. One claims that the rule is unconstitutional and another seeks injunctive relief from its imposition. Presuming the legal challenges are not persuasive, the rule will go into effect 120 days after publication in the Federal Registrar. Companies should work with counsel to prepare for this possibility.

Read more in “U.S. Federal Trade Commission Bans Employee Noncompete Agreements; Here’s What Employers Should Know”.

The Legal & Claims practice within the Financial Services Group at Aon has published the twentieth edition of the Year in Review.

In terms of frequency and severity of traditional securities class action claims, the number of filings increased, from 197 in 2022 to 213 in 2023. This is still well below the approximately 400 annual filings during the years 2017-2019, which were driven by federal mergers and acquisitions case filings, which rarely occurred in 2023. Those cases are now largely brought as individual actions, so do not appear in the current statistics. The increased number in 2023 was driven early in the year by banking cases, and then throughout the year by cases in the biotech and technology sectors. The average median settlement numbers increased considerably in 2023. It was also a year that saw the continued trend of large derivative settlements involving cash paid into a company as opposed to purely governance remediation.

Continuing from 2022, environmental, social and governance (ESG) matters remain an issue, from both proponents and detractors. A backlash has developed resulting in both political and legislative activity and companies and organizations are navigating a difficult path between activists on either side.

Climate disclosure guidelines were issued early in 2024, and cyber disclosure guidelines at the end of 2023. Both requirements could result in more litigation.

The 2023 Legal & Claims Year in Review is available here.

In Muldrow v. St. Louis, 2020 WL 5505113, a female police sergeant got transferred out of the intelligence unit and replaced by a male officer. Sergeant Muldrow had received many nonmonetary benefits in her position, including: FBI credentials; use of an unmarked take-home vehicle; ability to pursue multi-jurisdictional investigations; and visibility with high-ranking police and government officials. While her pay and title remained the same, these nonmonetary benefits were revoked upon her transfer, prompting Muldrow then to file a discrimination claim under Title VII of the Civil Rights Act of 1964. The Act protects employees and job applicants from discrimination in employment decisions, including an employer’s decision to transfer an employee into another position involuntarily.

The Muldrow decision resolved a circuit split over whether an employee challenging a job transfer under Title VII must prove that the discriminatory employment action had caused “material harm”. Several U.S. Circuit Courts of Appeals historically had required Title VII plaintiffs to show “serious,” “significant,” or “material” harm related to the terms, conditions, or privileges of employment to bring a claim. In the lower courts in Muldrow, the District Court and Eighth Circuit used the “materially adverse” threshold of harm to find Muldrow’s claims unpersuasive, citing her failure to show a “materially significant disadvantage.” On appeal, however, a unanimous Supreme Court disagreed with the lower courts, holding a claimant must only show some harm associated with an identifiable term or condition of employment to warrant having the case assessed under Title VII.

The defendant in the case, the City of St. Louis, warned that this lower threshold of harm would open a flood of additional Title VII claims if only minimal harm was sufficient to move forward in determining whether discrimination was the cause of that alleged harm, but the Court rejected that concern. Employers should consult internal and external employment legal professionals about job transfer policies and recordkeeping. If you have questions about or are interested in obtaining employment practices liability coverage, please contact your Aon broker.

In April, the Illinois Senate passed SB 2979, a bill that aims to reform the statutory damages component of the Biometric Information Privacy Act (BIPA). If the bill passes in the Illinois House of Representatives in May, it may be enacted into law. As the law stands, entities that negligently violate BIPA are ordered to pay plaintiffs $1,000 or actual damages, whichever is greater. In intentional or reckless violations, plaintiffs’ recovery increases to $5,000 per violation or actual damages, whichever is greater. The amount of damages compounds for every violation, meaning each time a company collects or discloses a person’s biometric information, they owe another $5,000. As evidenced in the case below, the financial impact on a company can be catastrophic.

In one case, a group of workers for a fast-food franchise alleged that the franchise violated Sections 15(b) and (d) of BIPA by requiring them to scan fingerprints to view paystubs and access computers and then transiting the data to a third-party vendor, all without informed consent. That court, in a 4-3 decision, held that claims under the respective sections accrued each time the fast-food franchise collected or disclosed the information without consent. Associated damages were assessed at over 17 billion dollars. Hence, the call for legislative reform.¹

This bill, if enacted, could have a profound impact on entities that negligently or intentionally violate BIPA, potentially reducing the severity of associated claims and the financial burden on businesses. It would provide a single recovery to each individual whose information was unlawfully obtained or retained rather than multiple recoveries for each instance that an entity scans or transmits an individual’s biometric information.

Proceedings before the Illinois House are anticipated to occur prior to the end of its legislative session this May. If passed in the House, the bill will be reviewed by Governor Pritzker, who then has the option to sign the bill into law. The proposed changes to Illinois’s biometric law could prove favorable for companies and insureds by significantly reducing financial liabilities for violations. Aon will continue negotiating BIPA strategy with employment practices liability insurers as the bill progresses. If you have questions about or are interested in obtaining coverage, please contact your Aon broker.

1 Cothron v. White Castle Sys., Inc., 2023 IL 128004 (Feb. 17, 2023).

Average Price Per Million, Adjusted for Certain Items, decreased 20.4 Percent in the First Quarter

Average Change for Primary Policies with Same Limit and Same Deductible decreased 5.5 Percent

First Quarter Key Metrics and Highlights

• Average price per million decreased 29.9 percent compared to the prior-year quarter.
• Price per million for clients that renewed in both Q1 2024 and Q1 2023 decreased 15.0 percent.
• 76 percent of primary policies renewing with the same limit and deductible experienced a price decrease; 4 percent had a price increase.
• Overall price change for primary policies renewing with same limit and deductible was down 5.5 percent.
• 95.2 percent of primary policies renewed with the same limit.
• 83.9 percent of primary policies renewed with the same deductible.
• 80.6 percent of primary policies renewed with the same limit and deductible.
• 95.2 percent of primary policies renewed with the same carrier.

On April 29th, the Financial Services Group at Aon published the Pricing Index for Public D&O insurance for the three months ended March 31, 2024. The pricing index tracks premium changes relative to the base year of 2001.

The Pricing Index decreased to 1.29 from 1.84 in the prior-year quarter, the eighth quarterly decrease since Q4 2017. The average cost of $1 million in limits decreased 29.9 percent compared to the prior-year quarter.

However, Q1 2024 results, our seasonally smallest quarter, were impacted by a very large Communication Services client that purchased a two-year program in Q1 2023, and therefore was absent from the corresponding Q1 2024 sample.

Excluding this client, the Pricing Index decreased 20.4 percent in Q1 2024.

The FSG D&O Pricing Index for Q1 2024 is available here (registration required).

As proof of stake networks continue to grow, the role of the node operator has become increasingly important. At the time of writing, the Ethereum network has grown to $372B in market cap, with 26.35% ($97.72B) of available ETH supply currently being staked with a 3.25% CESR^TM (Composite Ether Staking Rate, as administered by CoinFund and calculated by CoinDesk Indices).¹ The traditional market participants have started to realize the potential in using their assets to earn rewards, but do not want to bear the risk themselves.

As a result, institutions are turning to professional staking node operators to help stake their assets and limit the exposure to being slashed or incurring network penalties. To gain comfort with staking node operators, institutions are conducting extensive diligence to understand the risks of staking, the controls, and insurances in place to mitigate them. With the expectation of a spot Ethereum ETF, the importance of due diligence, insurance and understanding of the risks becomes heightened.

Currently there have been seven applications pending with the SEC that are expecting a decision in May.² Notably, Fidelity was the first to revise their filing to include staking as an effort to try and maximize the opportunity for potential investors³, with other applicants considering the same approach.⁴ While it is still uncertain whether these applications will be approved this cycle, the efforts taken by large asset managers is a strong signal of the momentum gathering behind adoption and what is to come.

Since the approval of the spot Bitcoin ETFs in January, net inflows have grown at a rapid pace, sending Bitcoin’s price to new all-time highs. Out of the numerous ETFs approved, Blackrock’s iShares Bitcoin Trust set a record for the largest ETF launch in US history during the first month.⁵ This indicates that there is a strong interest for these new products from a new class of investor. These investors will seek to optimize their profits in an Ethereum ETF, and staking rewards are an important factor in this. With the added complexity staking brings to the makeup of a potential Ethereum ETF, scalable insurance solutions can enhance the risk profile of the node operators who empower these offerings. Insurance solutions can help to bring the trust and security that institutional investors require.

Aon has been focused on these challenges since Ethereum merged onto a proof-of-stake blockchain. Like many other web3 challenges, it has taken a collaborative effort between industry leaders to enable the development of the right products.

Now, staking insurance solutions that were once limited and unobtainable, have evolved into meaningful risk transfers that can be scaled with the support of experienced brokers who understand how to structure coverage and build capacity in a newer market. We are fortunate to have the support of many industry leaders and forward-thinking insurers to help create a safer market environment for all participants.

Increased activity in the digital asset markets has renewed interest from institutions and the assets dedicated to proof-of-stake networks is growing daily. Aon continue to dedicate resources and attention to the staking industry to educate insurers on the risks and enable solutions to scale. If you have questions or are interested in obtaining coverage, please contact your Aon broker.

For more information on staking risks and how Aon works with staking node operators and insurers to address these issues, please contact Glenn Morgan (glenn.morgan@aon.com).

Access the full whitepaper here.

1 Crypto Staking Explorer | Staking Rewards
2 Blockworks
3 CoinDesk
4 Grayscale Adds ETH Staking to Its Ethereum ETF Application - Decrypt
5 Cointelegraph

PLUS 2024 in New York dedicated half a day to discussions on employment practices liability (EPL) insurance. Chaired by Rachel Freedman (Sompo), Thomas Hams (Aon), Wendy Mellk (Jackson Lewis) and Chris Williams (Travelers), the in-person sessions covered nuclear verdicts, diversity, equity and inclusion concerns related to the decisions in Students for Fair Admissions, Inc. v. President of Fellows of Harvard College and Students for Fair Admissions, Inc. v. University of North Carolina, and a lightening round on hot topics.

Aon’s Samantha Manfredini Look moderated a lightning round that highlighted areas underwriters and claims professionals are focusing on, including: Agency aggressiveness; Reverse discrimination; Biometrics; Genetic information; Artificial intelligence; Pay transparency. A forthcoming webinar discussing California-based exposures will be held on May 1^st at 11am CST. Interested parties can register here. An additional pre-event webinar, an interview with Equal Employment Opportunity Commission’s Vice Chair, Jocelyn Samuels, can be accessed here. A PLUS EPL Think-Tank composed of experienced industry professionals are determining next year’s program with hopes of expanding the EPL conference to a full-day event.

Earlier this year, Aon cautioned plan sponsors about the potential for a new chapter of excessive fee litigation arising from employee health plans.

By way of background, the Consolidated Appropriations Act of 2021 amended ERISA Section 408(b)(2) to require consultants and brokers to health plans receiving compensation of $1,000 or more to provide detailed fee disclosures to the “responsible plan fiduciary”. Further, the fees of plan consultants and brokers ultimately extends to other services for which they contract such as recordkeeping and administrative services, third-party administrator (TPA) services (processing benefit claims), and pharmacy benefit manager (PBM) services (processing pharmacy claims).¹ As a result, plan sponsors and their fiduciaries are required to monitor the “reasonableness” of these fees, similar to how sponsors of retirement plans and their fiduciaries must monitor third-party service provider fees.

That potential for new litigation is now a reality, as a pharmaceutical company has been sued in a purported class action contending that the company and its plan fiduciaries:

“breached their fiduciary duties and mismanaged [the company’s] prescription-drug benefits program, costing their ERISA plans and their employees millions of dollars in the form of higher payments for prescription drugs, higher premiums, higher deductibles, higher coinsurance, [and] higher copays . . .”²

Among other allegations, the plaintiff argues that the company and its plan fiduciaries breached their fiduciary duties in selecting a PBM for the plan, and in failing to “take available steps to rein in its PBM’s profiteering”.³

Fiduciary liability insurers are concerned that this is not an isolated case because: (a) another major plaintiffs’ firm is already trolling for potential plaintiffs to bring “Excessive Healthcare Plan Fee” claims against more than 20 large employers; and (b) the Department of Labor is likely keeping watch for such potential claims.⁴

To protect against this exposure and reduce the risk of liability, Aon’s Legal Consulting Group advises plan sponsors to review, upgrade and formalize their health and welfare plan fiduciary processes to include the following (among others):

• Establish and train a health and welfare plan fiduciary committee
• Establish a process for selecting TPAs, PBMs, and other service providers (e.g., collect data concerning pricing and quality, and use that data in the selection process)
• Monitor vendors and plan performance
• Conduct regular RFPs (e.g., for insurers, TPAs, PBMs)
• Evaluate contracts with TPAs, PBMs, and other service providers
• Regularly review and update plan documents, summary plan descriptions, and vendor documents
• Protect plan assets including protected health information (PHI) from disclosure or corruption by engaging in HIPAA Security Rule risk analysis
• Secure appropriate levels of fiduciary liability insurance to protect individual plan fiduciaries

Aon will continue to provide updates on this developing litigation. If you have questions about or are interested in obtaining coverage, please contact your Aon broker.

1. Per “Fee Frenzy: Navigating the Expanding World of Excessive Fee Claims” (a webinar co-presented by Morgan, Lewis & Bockius and Chubb Insurance, 11/7/23)
2. Per Class Action Complaint, Lewandowski v. Johnson and Johnson, Case No. 1:24-cv-00671 (D.N.J.), paragraph 3
3. Id. at paragraph 7
4. Schlichter Exclusive: Does a New Wave of Fiduciary Litigation Loom? | National Association of Plan Advisors (napa-net.org)

Aon’s First Quarter 2024 Employment Practices Liability (EPL) Advisor includes insights on notable court cases and employment practices risk issues, focusing on legal trends and law changes, the evolving marketplace, and claims examples.

The Advisor can be accessed here.

EPL/W&H advisor archive

This edition highlights several developments, including the settlement of the largest derivative matter. Cases of interest include interpretations of the claims and related claim definitions and evolving notice issues. In Q4, several cases involved environmental, social and governance (ESG) issues in the U.S. and abroad. We also highlight matters involving the Biometric Information Privacy Act (BIPA) and cyber incidents.

The Q4 2023 Legal & Claims Quarterly Review is available here.

Legal & Claims Review Archive

At the end of 2023, a California federal court ruled in coverage litigation that an insured could not look to its employment practices liability (EPL) policy for willful acts coverage. The facts of the underlying employment case were as follows.

A former employee alleged that his employer, a citrus growing and packaging company, made defamatory statements that he was involved in criminal activity and had stolen from them. A jury agreed that the employer defamed the employee and that he should recover more than $4.9 million. After the employer paid the judgment, it looked to its insurer for indemnification of the damage award under the provision of its EPL contract covering “employment-related torts.” While the insurer defended the underlying action, it refused to cover the damage award, spurring the employer to file a lawsuit against them for denial of coverage. During this subsequent lawsuit, a California District Judge cited the state’s Insurance Code Section 533, which prohibits indemnification coverage when it relates to willful acts. The court held that defamation, by its nature, requires the active step of disseminating information, making it a willful or intentional act.

This case shows that, at least in California, there is precedent for allowing a potential Insurance Code violation to override coverage for willful or intentional acts. As a result, companies should work closely with their insurance broker to consider techniques such as favorable venue wording specific to both intentional acts and punitive damages, off-shore wrap policies, or placing their entire program off-shore to help ensure the broadest coverage possible for employment practices claims. If you have questions about or are interested in obtaining coverage, please contact your Aon broker.

Following a lengthy comment period that began with the SEC’s March 2022 proposed SPAC disclosure rules, on January 24, 2024, the SEC adopted final SPAC disclosure rules (Final Rules). Overhauling the existing – often perceived as more lenient – disclosure regime applicable to SPAC and deSPAC transactions, the Final Rules impose new and more onerous reporting requirements that the SEC Chair himself analogized as “substantially aligned with those of traditional IPOs.”¹

The enhanced reporting obligations have substantial directors’ and officers’ (D&O) liability insurance implications.² The SEC’s focus on SPAC/deSPAC transactions – paired with the SEC’s Final Rules – necessitates a careful review of SPAC and deSPAC deal participants’ indemnification agreements, as well their D&O insurance policies. It’s important insureds begin reviews and craft appropriate coverage terms for the private company target and SPAC in unison.

Among other things, deSPAC transaction participants and resulting go-forward companies should review their D&O policies to ensure adequate and continuous coverage, with language concerning prior acts and pre-deal (i.e., “roadshow”) statements, claim interrelatedness, entity vs. insured claims, and split retentions among the notable provisions warranting review.

The Final Rules’ release is available here. In addition to other new requirements, the Final Rules:

• Require that the private company target in a registered deSPAC transaction be a co-registrant on the deSPAC registration statement, and thereby subject itself and its D&O signatories to liability under Section 11 of the Securities Act of 1933. In the Final Rules’ accompanying release, the SEC predicted that, in light of this new liability, some private target companies will spend significant additional time and resources in reviewing deSPAC-related disclosures, while others might elect to forego deSPAC transactions and this related liability altogether.
  
  
• Render unavailable to SPACs the so-called “safe harbor” from liability for certain forward-looking statements (including with respect to projections of target companies), as otherwise provided under the Private Securities Litigation Reform Act of 1995.
  
  
• Require additional disclosures about SPAC sponsors (including their compensation), actual and potential conflicts of interest, and shareholder dilution.
  
  
• Mandate new “disclosures regarding deSPAC transactions, including (1) if the law of the jurisdiction in which the SPAC is organized requires its board of directors (or similar governing body) to determine whether the de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders, or otherwise make any comparable determination, disclosure of that determination, and (2) if the SPAC or SPAC sponsor has received any outside report, opinion, or appraisal materially relating to the de-SPAC transaction, certain disclosures concerning the report, opinion, or appraisal.”³
  

Insureds are encouraged to consult with an experienced broker to analyze the myriad risks and exposures attendant to a SPAC/deSPAC transaction and to ensure robust D&O coverage is in place to mitigate such risks. If you have questions about your coverage or are interested in obtaining coverage, please contact your Aon broker.

1 https://www.sec.gov/news/statement/gensler-statement-final-rule-012424 (Final Rules Release).
2 The Final Rules are set to become effective 125 days after their publication in the Federal Register.
3 Final Rules Release.

In the wake of significant crypto-related incidents in 2022, including the FTX and Terraform Labs collapses, the SEC’s Crypto Assets and Cyber Unit responded with increased enforcement actions in 2023. Cornerstone Research’s latest report, SEC Cryptocurrency Enforcement: 2023 Update, sheds light on this uptick in activity and highlights litigation trends and considerations for digital asset industry participants.

This report reveals enforcement actions in 2023 actions increased 53% from the previous year and is the most vigorous enforcement year to date. This surge included both litigations and administrative proceedings, with monetary settlements reaching an imposing $281 million. This is consistent with the upwards trend since the appointment of chair Gensler in 2021. The SEC continued its focus on initial coin offerings and most of the enforcement actions alleged fraud and/or offering of unregistered securities. Additional new areas of focus were observed in the actions against staking services and Non-Fungible Tokens.

A divergence in perspectives among SEC Commissioners becomes evident after analysis of the report, as Cornerstone specifically highlights public dissenting opinions issued by Commissioners Peirce and Uyeda. These differing views highlight the complexities and evolving nature of crypto regulation. Some commissioners advocate for a more cautious and measured approach, emphasizing the need for clear regulatory frameworks. Others push for more rigorous enforcement to protect investors and ensure market integrity. This disparity in opinions is critical for understanding the future of the SEC’s regulatory direction in the cryptocurrency space.

Since the mainstream emergence of crypto markets in 2017, it has been the sentiment of many insurers that the uncertain regulatory environment and lack of data are the leading factors in avoidance of the crypto industry. This report validates at least one of the two concerns; however, as the industry continues to evolve, insurers can leverage this data to take a more informed underwriting approach for multiple lines of coverage, especially directors and officers insurance. Understanding the SEC’s current enforcement trajectory is crucial for predicting potential loss scenarios and considering how businesses in the US plan to navigate these well know regulatory challenges that have been highlighted by allegations of non-compliance and misconduct.

In light of the SEC’s stance, it’s imperative for insurers to stay abreast of these developments and in close communication with their clients and brokers, adapting their underwriting strategies to navigate the evolving landscape of crypto-related risks and regulatory complexities. This proactive approach will be key in managing the dynamic risk profile of the crypto sector this year and beyond.

For more information, the full report can be accessed here.

Average Price Per Million, Adjusted for Certain Items, decreased 14.4 Percent in the Fourth Quarter

Average Change for Primary Policies with Same Limit and Same Deductible decreased 10.0 Percent

Fourth Quarter Key Metrics and Highlights

• Average price per million decreased 17.5 percent compared to the prior-year quarter.
• Price per million for clients that renewed in both Q4 2023 and Q4 2022 decreased 17.9 percent.
• 80 percent of primary policies renewing with the same limit and deductible experienced a price decrease; 7 percent had a price increase.
• Overall price change for primary policies renewing with same limit and deductible was down 10.0 percent.
• 96.8 percent of primary policies renewed with the same limit.
• 84.0 percent of primary policies renewed with the same deductible.
• 82.1 percent of primary policies renewed with the same limit and deductible.
• 96.8 percent of primary policies renewed with the same carrier.

On February 5th, the Financial Services Group at Aon published the Pricing Index for Public D&O insurance for the three months ended December 31, 2023. The pricing index tracks premium changes relative to the base year of 2001.

The Pricing Index decreased to 1.41 from 1.71 in the prior-year quarter, the seventh quarterly decrease since Q4 2017. The average cost of $1 million in limits decreased 17.5 percent compared to the prior-year quarter.

However, as in previous quarters, there were several prior-year IPO and DeSPAC (Business Combination) clients that renewed with considerable decreases in Q4 2023 as they move further away from the original transaction. Prior-year IPOs renewing in Q4 2023 decreased, on average, 45.9 percent, while prior-year DeSPAC transactions renewing in Q4 2023 decreased an average of 37.2 percent. Excluding these clients, the Pricing Index decreased 14.4 percent in Q4 2023.

The FSG D&O Pricing Index for Q4 2023 is available here (registration required).

Tokenization of real-world assets is one of the most important developments to follow heading into 2024. Aon Growth Venture’s Web3 team has been working with industry natives and financial institutions to develop solutions for tokenization, smart contracts, and the evolving risk landscape.

What is asset tokenization and how is it being used by a growing number of financial institutions?

Asset tokenization has the potential to increase transparency, drive efficiency, create greater liquidity and investor access, enhancing security and compliance. However, there are still many challenges and risks, such as smart contract failures and theft of assets, that businesses need to understand and manage to safely use this technology.

For more in-depth perspectives on these questions and risk issues, please contact us.

For more information, access the full whitepaper here.

Insurance products and services offered by Aon Risk Insurance Services West, Inc., Aon Risk Services Central, Inc., Aon Risk Services Northeast, Inc., Aon Risk Services Southwest, Inc., and Aon Risk Services, Inc. of Florida and their licensed affiliates.

Following the collapses of certain regional banks in March 2023, the Financial Services Group at Aon discussed the potential for heightened regulation. The U.S. Federal Deposit Insurance Corporation (FDIC) recently approved proposed guidelines establishing corporate governance and risk management standards for covered financial institutions. This development accentuates the scrutiny and risk exposure that financial institutions’ directors and officers (D&Os) face. The comment period for the proposed guidelines will close on February 9, 2024.

Among other heightened requirements, the proposed guidelines would impose the following:

• Covered institutions must follow a “three lines of defense” risk management approach involving oversight from frontline business units, as well as independent risk management and internal audit functions.
  
  
• Covered institutions must develop written risk management programs, risk appetite statements, and processes for identifying and escalating breaches of such statements.
  
  
• Covered institutions’ boards of directors are deemed responsible for and must: actively oversee their banks’ risk management; be comprised of a majority of independent directors (with more stringent requirements regarding “independence”); set an appropriate tone from the top; adopt a written code of ethics; adopt processes to document violations of law and report them to appropriate enforcement authorities; and establish certain board committees (including risk, audit, and compensation).
  
  

Applicability: The proposed guidelines would apply to (among others) all insured state non-member banks with assets greater than $10 billion, including such banks that do not meet this asset threshold on the day the proposed guidelines become effective but later meet it on two consecutive call reports. The FDIC will reserve the authority to apply the proposed guidelines to banks with less than $10 billion in total consolidated assets if the FDIC deems such banks’ operations as high-risk or highly complex.

Enforcement: If a bank fails to meet a standard within the proposed guidelines, the FDIC can require the bank to submit a plan outlining the steps it will take to comply with the standard. If a bank fails to submit or implement such a plan in any material respect, the FDIC may: require the bank to correct the failure; impose on the bank increased capital requirements, or restrictions on growth or interest paid on deposits; or, ultimately, bring an enforcement action against and seek civil money penalties from the bank.

The proposed guidelines’ heightened requirements bring additional risks to covered institutions and their D&Os. These risks include potential regulatory investigations concerning banks’ corporate governance and risk management practices, as well as related or follow-on securities and/or derivative lawsuits should such practices be found insufficient. Similar risks already have materialized with financial institutions (for example, Silicon Valley Bank as alluded to above). Examples also include one of the largest financial institutions in the world recently paying historic settlements, fines, and penalties to resolve shareholder and government claims concerning well-publicized alleged branch-level malfeasance brought about by deficient internal controls that thwarted the bank’s “tone at the top” and “three lines of defense” risk management model. Exposures surrounding internal controls such as those required by the FDIC’s proposed guidelines are particularly acute given the SEC’s recent novel claims tied to allegedly insufficient controls concerning corporate assets and internal reporting, as well as recent Delaware case law confirming that corporate officers (and not solely directors) have a duty to implement and oversee their company’s internal controls.

The FDIC’s proposed guidelines highlight the importance of implementing sound risk management practices that are bolstered by robust internal controls. D&O insurance can be a vital component of a strong risk management program. Although these guidelines would apply to financial institution insureds, all insureds should be prepared to discuss their corporate governance and internal controls during the D&O underwriting process. Insureds should work with an experienced broker to optimize D&O coverage in the event of regulatory investigations and other D&O matters such as shareholder litigation that may arise out of corporate governance and internal control issues. Although policy language varies, notable D&O coverage provisions may include the definition of “Loss,” choice of law and/or “most favorable venue” terms, the priority of payment clause and conduct exclusions (including any carvebacks). Equally notable considerations, insureds should examine and understand overall program limits, structures, and allocations across pertinent coverages and the availability of and terms surrounding entity coverage in the event of a government investigation.

If you have any questions about or are interested in obtaining coverage, please contact your Aon broker.

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

Insurance products and services offered by Aon Risk Insurance Services West, Inc., Aon Risk Services Central, Inc., Aon Risk Services Northeast, Inc., Aon Risk Services Southwest, Inc., and Aon Risk Services, Inc. of Florida and their licensed affiliates.

While cyber risks are nothing new, the increasing exposure that companies and their directors and officers (D&Os) face with respect to cybersecurity practices and disclosures is becoming ever more apparent. On November 2023, the New York State Department of Financial Services (DFS) adopted amendments (Amendments) to the DFS’s landmark Cybersecurity Requirements for Financial Services Companies (Regulation). In the most significant expansion of the Regulation since it became effective in March 2017, the Amendments substantially augment the cyber requirements with which covered financial services entities such as banks and insurers must comply.

Among others, the Amendments impose the following obligations on covered entities:

• Mandatory reporting to the DFS of cybersecurity events at covered entities’ service providers; the deployment of ransomware within company systems; the payment of cyber ransoms; and detailed descriptions concerning such ransom payments, including all diligence performed to find alternatives and to ensure compliance with applicable rules and regulations, e.g., of the Office of Foreign Assets Control (OFAC).
  
  
• Numerous internal governance requirements, including heightened upward reporting obligations imposed on CISOs, and mandatory cybersecurity oversight by a “senior governing body” (generally, a board of directors or committee thereof) that must: (i) have a sufficient understanding of cybersecurity-related matters to exercise such oversight, (ii) ensure that management develops, implements, and maintains the company’s cybersecurity program, (iii) regularly review management’s cybersecurity reports, and (iv) confirm that management has allocated sufficient resources to the cybersecurity program.
  
  
• Independent cyber audits and other enhanced obligations with which large “Class A” companies must comply.
  
  
• The development of various cyber-related written plans, policies, and procedures concerning, e.g., passwords; multi-factor authentication; asset inventorying; data encryption; system user monitoring and filtering designed to block malicious content; incident response plans and business continuity and disaster recovery plans; mandatory employee trainings; and vulnerability management, including regular cyber penetration testing.
  
  
• The company’s CISO’s and most senior executive’s annual certification of material compliance with the Regulation.
  
  

D&O Insurance Implications: Much like the new SEC cyber disclosure requirements noted above, the Amendments similarly provide a foundation from which D&O claims might arise. These potential claims could involve regulatory investigations and penalties, as well as shareholder derivative claims in the event that, for example, a given entity’s non-compliance with the Regulation results in penalties levied by the DFS, or an entity’s ransom payment to threat actors violates OFAC regulations (as OFAC has suggested) and results in OFAC-levied penalties. The risks surrounding such claims are particularly acute given the recent surge in cyber-related D&O claims alluded to above, recent case law in Delaware confirming that corporate officers (not solely directors) have a duty to implement and monitor controls, which would include those required by the Amendments, and DFS penalties levied to date. To better mitigate these risks, financial institution insureds subject to the Regulation – just like all insureds – should regularly audit their D&O liability policies, understand the indemnification and officer-related provisions of their foundational documents and D&O policy language, consider dedicated Side A D&O coverage, and be prepared to discuss their cyber-related internal controls during the D&O underwriting process.

Overlapping coverage with a cyber policy and D&O: Depending on the facts and circumstances, a company may find that it is looking to both its cyber and D&O programs for potential coverage. There is no one size fits all approach for potentially overlapping coverage, necessitating a detailed review of policy language against the facts and circumstances. Given the differences in the breadth of coverages in both cyber and D&O insurance policies, the overlap between these types of policies will vary. In the event there is potential overlap (e.g., because the cyber policy does not exclude securities claims and the D&O policy does not exclude cyber-related claims), the “Other Insurance” provisions could be important.

Implications for cyber policy coverage for fines and penalties: Cyber policy language varies from form to form as to what constitutes a regulatory proceeding and a fine, and such language often contains caveats around the insurability of fines/penalties. Inclusion of fines/penalties within the definition of “Loss” varies from form to form: some policies do not provide such coverage at all, while others do, but often with certain caveats or exceptions on breadth of coverage.

An experienced broker can help navigate these issues and aid in optimizing coverage for cyber-related D&O claims, determine if there is potential overlap with cyber coverage, and determine whether language concerning priority of either type of insurance program should be inserted into applicable “Other Insurance” provisions. A discussion about these issues with can assist in determining the best language for a particular company’s needs.

Related Insights

• SEC’s Enforcement Action Further Underscores Cyber Risks
  
• Risk Management Considerations in the Wake of the SEC’s Cybersecurity Disclosure Rules
  
• SEC Sharpens Focus on Cybersecurity with New Disclosure Rule
  

This edition highlights several developments, including the settlement of one of the largest derivative matters. Cases of interest include interpretations of the claims and related claim definitions and evolving notice issues. In Q3, several cases involved environmental, social and governance (ESG) issues in the U.S. and abroad. We also highlight matters involving the Biometric Information Privacy Act (BIPA) and cyber incidents.

The Q3 2023 Legal & Claims Quarterly Review is available here.

Legal & Claims Review Archive

The failures of some significant financial institutions in 2023 has increased challenges to the sector. The regional bank stress events sharpened fidelity/crime underwriters’ awareness of internal and external controls related to their insured’s risks and their fraud threat environment. This increasing awareness has also trickled into the broader commercial space.

While financial stability and firm resilience remained a focus for underwriters, we also saw an uptick in insurer renewal requests for evidence of robust protection from employee defalcation, forgery, computer crime, funds transfer fraud and social engineering. Raising fraud awareness and clarifying individual employee accountability was seen by underwriters as an effective tool to improve risk profiles. Companies that demonstrated a strengthening of existing prevention and detection capabilities with the implementation of new control processes and technologies to detect and/or prevent fraud were received very positively by the market. The continued dynamics of smart-working models typically requires companies to outline VPN arrangements for employees’ remote system access and detail controls for funds and securities movements initiated by employees.

Pricing stabilized compared to 2022 and we experienced consistency in the underwriting of fidelity/crime programs within the United States, London and Bermuda. We are seeing substantial limits available for all types of coverages within a fidelity/crime program, provided the control environment is viewed positively by the underwriters. By now, most insureds have seen theft of information, destruction of data, reconstruction costs related to the destruction of data, and extortion cover removed from their crime programs, as that is generally viewed by the market as covered by cyber policies. The market has continued to see an increased frequency of social engineering notifications and most significant fidelity/crime losses continue to involve employees.

Regarding kidnap-ransom programs, the availability of comprehensive coverage terms remained prevalent in the market. However, underwriters have significantly limited coverage in Russia, Ukraine and other territories with ongoing conflicts. Pricing is highly dependent upon the analysis of the information presented to underwriters and exposure to high-risk territories generally leads to an upward pressure on rate. Insureds who are coming off three-year deals, that have ramped-up operations, expanded territories and hired employees since the last renewal amid the pandemic, are experiencing pricing changes due to this exposure growth.

We are optimistic heading into 2024 for fidelity/crime products for the financial institution and commercial sectors. There will likely be continued market pressure on rates. However, the availability of viable market alternatives should continue to offer options for insureds.

We are cautiously optimistic about the kidnap-ransom product. Insurers will keep a close eye on territories with continuing conflicts. Capacity is substantial and crisis management firms stand ready to assist with the ever-changing environment.

If you have any questions about or are interested in obtaining coverage, please contact your Aon broker.

All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.

The New York Appellate Division – First Department found that the Private Securities Litigation Reform Act’s (PSLRA) automatic discovery stay “applies to any private action, whether brought in state or federal court.”

Unlike claims commenced pursuant to the Securities Exchange Act of 1934, wherein federal courts have exclusive jurisdiction, claims under the Securities Act of 1933 may be filed in state or federal court. Following Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), which precluded removal of 1933 Act claims from state court to federal court, plaintiffs increased their efforts, at times, to utilize state courts to circumvent the requirements of the PSLRA – including the automatic stay of discovery while a motion to dismiss is pending.

State trial courts have grappled with whether the PSLRA discovery stay applies in actions filed in state court. For example, in In re Everquote, Inc. Securities Litigation, 65 Misc. 3d, 226 (NY Sup Ct, NY County 2019), the court, in reaching a conflicting conclusion than Matter of PPDAI Group Securities Litigation, 64 Misc. 3d 1208(A) (NY Sup Ct, NY County 2019), found that the “simple, plain, and unambiguous language expressly provides that discovery is stayed during a pending motion to dismiss...[n]owhere does it indicate that it applies only to actions brought in federal court.”

After analyzing the issue, the First Department held that the PSLRA applies in state court actions filed under the Securities Act of 1933 to stay discovery pending the trial court’s resolution of a motion to dismiss. The court further clarified that the PSLRA discovery stay does not apply during the pendency of appeals from denied motions to dismiss – while noting that this serves to “maintain uniformity between the federal and state systems, preventing an incentive for forum shopping.”

While this decision is helpful to defendants in New York, further clarification is needed in other jurisdictions, such as California. If you have questions about the latest D&O developments, your coverage or are interested in obtaining coverage, please contact your Aon broker.

Camelot Event Driven Fund v. Morgan Stanley & Co. LLC, 2023 N.Y. App. Div. LEXIS 5467 (NY 1st Dep’t, 2023)

The information contained herein is intended for informational purposes only. This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

Average Price Per Million, Adjusted for Certain Items, decreased 16.3 Percent in the Third Quarter

Average Change for Primary Policies with Same Limit and Same Deductible decreased 9.2 Percent

Third Quarter Key Metrics and Highlights

• Average price per million decreased 19.7 percent compared to the prior-year quarter.
  
• Price per million for clients that renewed in both Q3 2023 and Q3 2022 decreased 17.0 percent.
  
• 86 percent of primary policies renewing with the same limit and deductible experienced a price decrease; 3 percent had a price increase.
  
• Overall price change for primary policies renewing with same limit and deductible was down 9.2 percent.
  
• 96.0 percent of primary policies renewed with the same limit.
  
• 84.8 percent of primary policies renewed with the same deductible.
  
• 83.2 percent of primary policies renewed with the same limit and deductible.
  
• 100.0 percent of primary policies renewed with the same carrier.
  

On October 30^th, the Financial Services Group at Aon published the Pricing Index for Public D&O insurance for the three months ended September 30, 2023. The pricing index tracks premium changes relative to the base year of 2001.

The Pricing Index decreased to 1.26 from 1.57 in the prior-year quarter, the sixth quarterly decrease since Q4 2017. The average cost of $1 million in limits decreased 19.7 percent compared to the prior-year quarter.

However, as with last quarter, there were several prior-year IPO and DeSPAC (Business Combination) clients that renewed with considerable decreases in Q3 2023 as they move further away from the original transaction. Prior-year IPOs renewing in Q3 2023 decreased, on average, 48.5 percent, while prior-year DeSPAC transactions renewing in Q3 2023 decreased an average of 34.4 percent. Excluding these clients, the Pricing Index decreased 16.3 percent in Q3 2023.

The FSG D&O Pricing Index for Q3 2023 is available here (registration required).

The U.S. federal government’s intensified focus on environmental issues is reinforced by initiatives we have previously discussed, such as the Securities and Exchange Commission’s proposed climate-related disclosure requirements for public companies and the Department of Justice’s (DOJ) environmental justice enforcement strategy—a strategy that the DOJ is actively pursuing, exemplified by the recent environmental civil enforcement action against an internet retail company. Now, leading the charge at the state level is California, where, on October 7, 2023, Governor Newsom signed into law controversial landmark climate disclosure bills: SB-253 and SB-261.

These new California laws broadly apply to all companies – public and private – that operate in California, irrespective of where they are headquartered or organized. The new legislation requires that companies with total annual revenues over $1 billion (estimated to exceed 5,300 companies) must begin disclosing their Scope 1 (direct) and Scope 2 (indirect) greenhouse gas emissions by January 1, 2025, and their Scope 3 (indirect upstream and downstream) emissions by 2027. The new legislation also requires that companies with total annual revenues over $500 million (estimated to exceed 10,000 companies) must, by January 1, 2026, begin biennially reporting on their climate-related financial risks. Many observers have commented on the difficulty that companies might face in complying with these onerous disclosure requirements — particularly private companies that might lack robust and mature internal controls and reporting needed to accurately make the required disclosures. Even Governor Newsom himself has commented that the implementation deadlines of these new laws “are likely infeasible,” expressing concern that the laws could lead to “inconsistent reporting across businesses subject to the measure.”

With these new laws requiring burdensome disclosures comes enhanced risks for companies and their directors and officers (D&Os). Chief among such risks is the specter of shareholder litigation involving securities class action claims alleging misstatements with respect to companies’ environmental disclosures and derivative breach of fiduciary duty claims challenging D&Os’ oversight of companies’ environment-related practices and internal controls. Insureds should regularly audit their D&O insurance policies and work with an experienced broker to optimize coverage for environmental-related D&O claims.

Derivative lawsuits give corporate shareholders a platform to bring claims, on behalf of the corporation, against the corporation’s directors and officers for a wide range of alleged misconduct subject to specific procedural requirements. Shareholder plaintiffs often allege financial or reputational damage to the corporation because the directors or officers (D&Os) breach their fiduciary duties to the company.

Among other theories, plaintiffs in these cases may assert that corporate defendants wasted corporate assets, engaged in self-dealing, or failed to oversee the company’s operations adequately.

Until recently, the duty to monitor corporate operations had been viewed as a duty of the directors whom the law vests with the power to dictate the corporation’s affairs. This year, however, the Delaware Court of Chancery clarified that corporate officers likewise have the same duty to monitor and thus also may face derivative breach of fiduciary duty claims for failing to carry out their oversight obligations.

In the past, derivative lawsuit settlements focused on the remediation of corporate governance and other non-monetary corrective measures. It is still typical for corporate governance reforms to be agreed upon in derivative settlements; however, particularly in the past decade, derivative settlements have involved increasingly large monetary components – millions, and sometimes even hundreds of millions, of dollars.

Because derivative lawsuits are brought on behalf of the corporation as the allegedly aggrieved party, settlement or judgment proceeds generally are due to the corporation itself. Accordingly, the law generally forbids the circular result of corporations indemnifying the D&Os who are required to pay (or cause to be paid) such derivative settlement proceeds to the corporation. Indeed, many state statutes, including in Delaware, expressly prohibit a company from indemnifying D&Os for a derivative lawsuit settlement or judgment (as opposed to defense costs, which are generally indemnifiable).

Given the non-indemnifiable nature of what are often substantial monetary settlements in derivative lawsuits, Side A D&O insurance—which provides first-dollar coverage to D&Os for non-indemnifiable loss—can be critical for protecting individual D&Os’ personal assets when derivative lawsuit settlements are negotiated and ultimately funded. Without Side A coverage, D&Os may have to pay derivative settlements or judgments out of pocket.

Consult with your Aon broker for any questions regarding the application of Side A D&O insurance.

All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.

The Financial Services Group at Aon’s Fall 2023 EPL and Wage & Hour advisor includes insights on notable Supreme Court cases, artificial intelligence usage, and employment practices risk issues, focusing on legal trends and law changes, the evolving marketplace, and class action claims.

The W&H advisor can be accessed here.

EPL/W&H advisor archive.

On August 28, the SEC announced its first enforcement action targeting Non-Fungible Tokens (NFTs) in a matter settled with Impact Theory, the issuer of such NFTs.

According to the SEC’s Order Instituting Cease-and-Desist Proceedings, Impact Theory marketed and sold NFTs called “Founder’s Keys,” raising approximately $29.9 million worth of ether (ETH) from purchasers without registering the NFTs as securities.

Leading up to fundraising, Impact Theory publicly stated that it would ensure “people got a crushing, hilarious amount of value” from the Founder’s Keys, and that it would use the sale proceeds for “development,” “bringing on more team,” and “creating more projects.” Impact Theory also made statements tying its prospective fortunes to those of the purchasers, such as: “Our goal is to make sure that as Impact Theory is enriched, as [its founders] are enriched, as our team here at Impact Theory is enriched, that you guys also are enriched.”

Against the backdrop of these and other marketing statements, the SEC found that prospective and actual purchasers viewed the Founder’s Keys as investments, the value of which depended on Impact Theory’s success. The SEC found that this sentiment was evidenced by statements in Impact Theory’s Discord channel, such as: “Buying a founders key is [l]ike investing in Disney, Call of Duty, and YouTube all at once”; and “[T]here is at this point in time no investment that has such an amazing Risk to Reward Ratio. You are not investing in some key or PNG, you are investing in [the Impact Theory] team and regarding this is an opportunity that has never been there its like handing 20$ to Mark Zuckerberg in his dorm room.”

And, notably, Impact Theory tapped into the value that its purchasers had touted by programming the applicable smart contract so that the company received a 10% royalty on each secondary market sale of the NFTs.

As a result of these and other findings, the SEC concluded that the NFTs at issue were securities under the federal securities laws, and that Impact Theory violated federal securities laws by offering and selling the NFTs publicly without registering them as securities or an exemption from the registration requirements. Accordingly, and taking into account Impact Theory’s remedial efforts in buying back approximately $7.7 million worth of the NFTs at issue, the SEC has required Impact Theory to (among other things) destroy all of the Founder’s Keys, pay disgorgement of $5,120,718.27, pay prejudgment interest of $483,195.90, and pay a civil money penalty of $500,000.

In a dissenting statement issued when the SEC announced the Impact Theory settlement, Commissioners Uyeda and Peirce questioned the propriety of charging Impact Theory absent fraud despite its rescission efforts. They questioned more broadly the SEC’s perceived shoehorning of NFTs into the federal securities regime without the Commission having “offered guidance when NFTs first started proliferating.” Among other things, Commissioners Uyeda and Peirce stated that even the legitimate concerns over the “hype” that had enticed Impact Theory purchasers to spend nearly $30 million were “not a sufficient basis to pull the matter into [the SEC’s] jurisdiction,” explaining that “[w]e do not routinely bring enforcement actions against people that sell watches, paintings, or collectibles along with vague promises to build the brand and thus increase the resale value of those tangible items.”

These statements exemplify the digital asset industry’s long-held concerns that fractured views among the Commissioners leave unanswered many important questions concerning, e.g., the classification of NFTs, the need for investor protection and a tailored legislative framework, and secondary market transactions.

Notwithstanding these dissenting views, given the Impact Theory settlement and related commentary from certain of the SEC’s Commissioners, NFT industry participants purchasing management or directors’ and officers’ (D&O) liability insurance could face heightened scrutiny at upcoming renewals. It is important for companies to start D&O underwriting meetings early and have direct dialogue with underwriters, differentiating your company’s marketing strategy for NFT projects from the adverse findings in Impact Theory. In addition, these companies should work with an experienced broker to optimize coverage.

The Digital Asset practice at Aon has over 60 devoted specialists and is uniquely positioned to provide and service a full suite of insurance solutions for businesses operating on the cutting edge of finance and technology.

Managing and Mitigating Unfavorable and Costly Trends

Many employers may not be fully aware, but there are increasing fiduciary, compliance, and litigation risks associated with today’s 401(k) and 403(b) plans¹. For those serving in a fiduciary capacity for these plans, the level of personal accountability being assumed can be significant and misunderstood.

Excessive fee litigation cases in retirement plans have risen dramatically in frequency and severity and have put pressures on the fiduciary liability insurance market. Since 2020, excessive fee litigation has grown significantly with plaintiffs’ firms filing more than 250 lawsuits. These cases, which generally focus on fees that 401(k) and 403(b) plan participants pay for investment management or administration, are both expensive to defend and to resolve.²

Further, both private and public sector employers have also been subject to litigation from plan participants related to plan investments in environmental, social and governance (ESG)-focused funds. Alarmingly, legal commentators have suggested that “ESG fiduciary misconduct claims in private-sector 401(k)s are expected to rise as ESG becomes more of a political flashpoint.”³

Better Answers and Options are Available Through PEPs and Expert Plan Management

Today’s employers are, in general, very diligent in managing retirement plans. Substantial time and effort is taken to help participants receive value, and ultimately retirement and financial security from the plans. But for virtually all of the estimated 600,000 U.S. employers that sponsor a 401(k) or 403(b) program, this isn’t their core business or competency. Joining a Pooled Employer Plan (PEP) can help.

Following the passage of the SECURE Act in 2019, PEPs are available to deliver customized and comprehensive 401(k) and 403(b) programs. Organizations can leverage the benefits of pooling to deliver an improved program without all the work and risk, as PEPs provide value in three main areas: less work, less risk, and better outcomes for workers and retirees.

1 403(b) plans are utilized by the not-for-profit sector.
2 “Excessive Litigation Over Excessive Plan Fees in 2023”, Chubb
3 “American Airlines Hit With Class Suit Over ESG 401(k) Funds,” Bloomberg Law (June 2, 2023)

The full article, “Fiduciary and Litigation Risk in Today’s 401(k) and 403(b) Plans” was co-authored by Rick Jones, Senior Partner, Head of Aon PEP, and Curt Young, Partner, Operations and Compliance Lead for Aon Pep. Learn more about the Aon PEP here.

Last year’s landmark United State Supreme Court (SCOTUS) case, Viking River Cruises v. Moriana, signaled a “win” for California employers by enforcing employment-related arbitration agreements and class action waivers for Private Attorneys General Act (PAGA) claims, effectively waiving the ability of claimants to file these claims on a representative basis.

However, Adolph v. Uber Technologies, Inc. tested the scope and application of the Viking River Cruises holding under California law. The question before the California Supreme Court was whether an aggrieved employee compelled to arbitrate individual claims premised on California Labor Code violations had statutory standing to pursue class/representative PAGA claims in court.

Erik Adolph was a delivery driver for Uber’s UberEats platform in California. As a driver, he was required to accept Uber’s technology services agreement or timely opt out. Adolph did not timely opt out and was therefore bound by the arbitration provision requiring arbitration, on an individual basis only, for work-related claims against Uber. The relevant PAGA provision of the agreement stated:

“To the extent permitted by law, you and Company agree not to bring a representative action on behalf of others under the [PAGA] in any court or in arbitration. This waiver shall be referred to as the ‘PAGA waiver’.”

There was also severability language stating:

“If the PAGA Waiver is found to be unenforceable or unlawful for any reason, (1) the unenforceable provision shall be severed from this Arbitration Provision; (2) severance of the unenforceable provision shall have no impact whatsoever on the Arbitration Provision or the Parties’ attempts to arbitrate any remaining claims on an individual basis pursuant to the Arbitration Provision; and (3) any representative actions brought under the PAGA must be litigated in a civil court of competent jurisdiction...”

Adolph filed suit alleging individual and class claims under the Labor Code and Unfair Competition Law, claiming that Uber misclassified him and other delivery drivers as independent contractors instead of employees and wrongly failed to reimburse necessary business expenses. In an amended complaint, Adolph added a claim for civil penalties under PAGA.

The trial court, looking to the technology services agreement, granted Uber’s motion to compel arbitration of Adolph’s individual claims and dismissed the class action portion of his claim. Adolph then offered a second, amended complaint, retaining only his PAGA claim for civil penalties. The trial court granted Adolph’s request for preliminary injunction which prevented arbitration from proceeding under the theory that a claimant steps into the shoes of the attorney general to bring a PAGA claim and because the state has not consented to arbitration agreements, they are not enforceable. Uber appealed, but the Court of Appeals affirmed the injunction on arbitration. Prior to the Court of Appeals’ determination being reviewed, SCOTUS made a decision on Viking River Cruises, which touched on the issue of standing present here.

To have standing in a PAGA representative action, the plaintiff must be an “aggrieved employee,” defined as “any person who was employed by the alleged violator and against whom one or more of the alleged violations was committed.” Adolph’s status as an “aggrieved employee” was not challenged.

Looking to the enforceability of the PAGA waiver, the court reviewed caselaw. Viking River Cruises held that the primary purpose of the Federal Arbitration Act (FAA) was to ensure that private arbitration agreements are enforced according to their terms, requiring the enforcement of agreements to arbitrate individual PAGA claims. However, with regard to the question of whether a plaintiff whose individual claims were forced into arbitration still had standing as an aggrieved party to bring a representative action under PAGA, SCOTUS in Viking River Cruises expressly stated that the highest court of each state is the final arbitrator of its own state law(s) on the issue of standing and could take a contrary position for claims brought under its statutes.

Using the premise of statutory construction, the California court first reviewed the plain language of the PAGA statute and determined that a worker becomes an “aggrieved employee” with standing to litigate claims on behalf of themselves and others upon a Labor Code violation committed by the employer. It further held that standing is not affected by enforcement of an agreement to adjudicate in an alternate forum, like arbitration. Adolph’s allegations that Labor Code violations occurred while he drove for Uber gives him standing to file a PAGA action. Allowing an employee to serve as a PAGA representative, even if they did not personally experience every alleged violation, serves the state’s interest of vigorous enforcement. Therefore, because Adolph filed a PAGA action comprised of individual and class/representative claims, the order compelling arbitration of his individual claims did not strip him of standing to litigate the class/representative claims in court.

In one potential bright spot for employers, the California court did acknowledge that claimants could be forced to stay their representative actions for arbitration to proceed to determine if the individual was an aggrieved party. By leaving open the ability to require plaintiffs to arbitrate their individual claims first to determine if they qualify as “aggrieved,” the court in effect allows for a potentially lengthy and expensive arbitration process that the individual and his/her counsel would have to complete before knowing if that individual was even qualified to bring the representative action. This could make it that much harder for the individual and counsel to attempt to bring the representative action.

Adolph signals a shift back in favor of employees, at least in California, by allowing workers to pursue class/representative PAGA claims even when their individual claims are forced into arbitration due to an arbitration agreement. Nonetheless, companies with employees in California should work with employment counsel to review their arbitration agreements and determine if those agreements can be crafted to ensure that any such representative action would be stayed pending completion of any individual arbitration.

Contact your Aon representative for additional information.

In this edition we highlight several developments, including special purpose acquisition company (SPAC) litigation and an opinion whereby the court dismissed litigation over pre-merger statements. We review the United States Supreme Court ruling in Slack Technologies, LLC v. Pirani, which limits a plaintiff’s ability to bring certain Section 11 claims. Further litigation developments in “bump-up” cases related to acquisitions and cases dealing with related claims, application issues, board diversity, forum selection and the Biometric Information Privacy Act are also addressed.

The Q2 2023 Legal & Claims Quarterly Review is available here.

Legal & Claims Review Archive

A Delaware court rejected a shareholder’s attempt to obtain further materials from a company via a Delaware General Corporation Law §220 proceeding.¹

At issue was a company’s public opposition of a state’s proposed legislation. A shareholder contended that, in directing the company to publicly oppose the bill, the directors “either put their own beliefs ahead of their obligations to stockholders or flouted the risk of losing rights associated with [a special land district].”

The court, in dismissing the plaintiff’s proceeding and entering judgment for the company, acknowledged that “corporate speech on external policy matters brings both risks and opportunities,” and explained that the board is “empowered to weigh these competing considerations and decide whether it is in the corporation’s best interest to act (or not act).”

The court added, “a board may conclude in the exercise of its business judgment that addressing interests of corporate stakeholders – such as the workforce that drives a company’s profits — is ‘rationally related’ to building long-term value.” As a result, the court determined that the plaintiff did not have a “credible basis” to suspect wrongdoing or mismanagement, and therefore plaintiff’s request for additional production of books and records pursuant to §220 was rejected.

Read more in “Two Courts Defer to Boards’ ESG Decisions and Side with Defendants”.

Simeone v. Walt Disney Co., 2023 Del. Ch. LEXIS 154 (Del. Ch. 2023)

¹ 8 Del. C. §220

A claim filed in the English High Court by a non-profit organization against directors of an oil and gas company was one of the first attempts to bring a derivative action against directors for alleged mismanagement of climate risk. In bringing its action, the plaintiff asserted that the directors breached their statutory duties by:

• failing to adopt a measurable and realistic pathway to meeting the absolute net zero (NZ) emissions reduction target by 2050 set out in the company’s energy transition strategy
• failing to properly manage climate risk—including commercial, regulatory and stranded-asset risk
• failing to comply with an earlier Dutch court ruling requiring the company to reduce its worldwide aggregate CO2 emissions by at least net 45% at the end of 2030, relative to 2019 levels

The court criticized the plaintiff for seeking to impose absolute duties on directors which cut across their general duty to have regard to the myriad of complex and competing considerations directors face. In particular, the English High Court reiterated that management decisions made by the board of a company, in large part, could not be appealed to courts of law. For example, while the court noted there may be disagreement between the plaintiff and the company as to how best to achieve NZ 2050 targets, “the law respects the autonomy of the decision making of the Directors on commercial issues and their judgments as to how best to achieve results which are in the best interests of their members as a whole.”

Read more in “Two Courts Defer to Boards’ ESG Decisions and Side with Defendants”.

ClientEarth v Shell plc & Ors [2023] EWHC 1137 (Ch)

In two recent decisions, the United State Supreme Court ruled that the use of race as a factor in the college admissions process is unconstitutional under the Equal Protection Clause of the Fourteenth Amendment. Although each decision found that the university violated the Equal Protection Clause, the Court did not entirely overturn its previous ruling in Grutter v. Bollinger, where it held that the use of an applicant’s race as one factor in an admissions policy does not violate the Constitution. Nonetheless, the Court placed stricter limits on how race could be used in that process.

The Grutter decision acknowledged that student diversity was a compelling state interest that justified considering race in university admissions. Nonetheless, the Court cautioned that those considerations could not devolve into illegitimate stereotyping or discrimination against other minority groups. Race is only to be considered if advantageous for the candidate. Lastly, the Court said race-based admission processes needed to be limited in time, and the Court expected that twenty-five years after the decision, these processes should no longer be necessary.

Based on Grutter, the Court in Students for Fair Admissions, Inc. v. President of Fellows of Harvard College and Students for Fair Admissions, Inc. v. University of North Carolina said that the universities needed to show how their admissions programs: (1) allowed for strict judicial scrutiny, (2) did not use racial stereotypes, (3) did not negatively impact other minority groups, and (4) had an endpoint. The Court found that the respondents’ admissions systems failed all four of these criteria and must therefore be invalidated under the Equal Protection Clause of the Fourteenth Amendment, for the following reasons:

• The Court held that both programs failed the strict scrutiny test because the benefits that the admissions practices allegedly sought to achieve were so amorphous that it was unclear how courts would be able to measure any of these goals or when they had been reached. The admissions programs also needed to articulate a meaningful connection between the means they employed and the goals they pursued.
• The Court found that when a university admits students based on race, it engages in the assumption that students of a particular race, because of their race, think alike, which the Court viewed as a stereotype.
• The Court found that the programs failed the negative impact test because the programs resulted in fewer Asian students being admitted than otherwise would have been the case.
• The Court noted both institutions’ programs failed the tests set in Grutter because neither program had an endpoint.

However, the Court’s opinion did identify ways race could be used as a factor in admissions. For instance, applicants could discuss how race affected their lives if that discussion is concretely tied to a quality of character or unique ability the applicant can contribute to the university.

While the Court’s opinion in this case applies specifically to college admission programs, it could impact hiring practices and employer sponsored diversity, equity & inclusion (DEI) programs in the employment context. Immediately after the decision, a letter was issued by Attorney Generals from 13 states purporting to put Fortune 100 companies on notice that the new ruling could result in greater scrutiny of DEI efforts to the extent that they promote racial quotas in hiring, recruiting, retention, and advancement. Meanwhile, while recognizing racial quotas were already illegal in the employment context under Title VII of the Civil Rights Act of 1964, various employment law firms did caution for a careful review of companies’ DEI initiatives in light of the Students for Fair Admissions, Inc. ruling, considering its guidance on future rulings concerning challenges to preferential hiring practices and DEI initiatives.

Students for Fair Admissions, Inc. v. President of Fellows of Harvard College, No. 20-1199 (June 29, 2023)
Students for Fair Admissions, Inc. v. University of North Carolina, No. 21-707 (June 29, 2023)
Grutter v. Bollinger, 539 U.S. 306 (2003)

Average Price Per Million, Adjusted for Certain Items, decreased 23.7 Percent in the Second Quarter

Average Change for Primary Policies with Same Limit and Same Deductible decreased 11.0 Percent

Second Quarter Key Metrics and Highlights

• Average price per million decreased 26.8 percent compared to the prior-year quarter.
  
• Price per million for clients that renewed in both Q2 2023 and Q2 2022 decreased 21.8 percent.
  
• 83 percent of primary policies renewing with the same limit and deductible experienced a price decrease; 3 percent had a price increase.
  
• Overall price change for primary policies renewing with same limit and deductible was down 11.0 percent.
  
• 94.7 percent of primary policies renewed with the same limit.
  
• 83.4 percent of primary policies renewed with the same deductible.
  
• 81.5 percent of primary policies renewed with the same limit and deductible.
  
• 96.0 percent of primary policies renewed with the same carrier.
  

On July 31^st, the Financial Services Group at Aon published the Pricing Index for Public D&O insurance for the three months ended June 30, 2023. The pricing index tracks premium changes relative to the base year of 2001.

The Pricing Index decreased to 1.15 from 1.57 in the prior-year quarter, the fifth quarterly decrease since Q4 2017. The average cost of $1 million in limits decreased 26.8 percent compared to the prior-year quarter.

However, there were several prior-year IPO and DeSPAC (Business Combination) clients that renewed with considerable decreases in Q2 2023 as they move further away from the original transaction. Prior-year IPOs renewing in Q2 2023 decreased, on average, 42.0 percent, while prior-year DeSPAC transactions renewing in Q2 2023 decreased an average of 45.0 percent. Excluding these clients, the Pricing Index decreased 23.7 percent in Q2 2023.

The FSG D&O Pricing Index for Q2 2023 is available here (registration required).

On July 26, 2023, the SEC announced its adoption of rules requiring registrants to disclose material cybersecurity incidents they experience (generally, within four business days after determining that such an incident is material) and to make annual disclosures concerning their cybersecurity risk management, strategy, and governance. Although the SEC acknowledged that “many public companies” already provide “cybersecurity disclosure to investors,” the SEC’s adoption of this new rule that specifically requires cybersecurity disclosures underscores the significant attention to the issue.

Cybersecurity exposures have become increasingly significant for companies and their directors and officers (D&Os). The focus of consumers, shareholders, and government bodies on corporate cybersecurity practices, data breaches, and related public disclosures evidences that cyber exposure is a D&O risk. In the U.S., for example, the former chief information security officer (CISO) of a ride-hailing company recently was sentenced to three years’ probation and a $50,000 fine in a data breach-related federal criminal case. By way of further example, an IT management software company and its D&Os (including its CISO) have been embroiled in state and federal court shareholder litigation asserting securities and derivative claims arising out of a data breach, with the company and other defendants recently agreeing to settle a securities class action for $26 million and the company disclosing that it and certain of its current and former officers and employees (including its CISO) had received Wells Notices from the SEC.

In light of the enhanced cybersecurity exposures that companies face, including those described above, buyers should work with an experienced insurance broker to optimize individual coverage for D&Os (including their CISOs) in the event of, among other things, a data breach, cyber-related shareholder litigation, and cyber-related government investigations and lawsuits.

Read more about the risk management considerations in the wake of the SEC’s new cybersecurity disclosure rule here.

The U.S. Supreme Court’s Groff v. DeJoy, Postmaster General decision revisits the Court’s guidance on religious accommodation and what constitutes an “undue burden”, which could impact how employers make religious accommodation decisions in the future.

The case involves Gerard Groff, an Evangelical Christian employee of the U.S. Postal Service. Hired in 2012, the employee’s initial role did not require him to work on Sunday. This changed in 2013, after the Postal Service began making Sunday deliveries as part of a new business agreement.

To avoid the requirement to work on Sundays, the plaintiff transferred to a rural facility. However, this facility also began making Sunday deliveries and Groff was expected to work some Sundays. He refused to work based on his religious beliefs. While redistributing the plaintiff’s Sunday deliveries to other staff members, the Postal Service put the plaintiff on progressive discipline, and he eventually resigned.

Groff sued the Postal Service under Title VII, asserting the Postal Service could have accommodated his religious practices without undue hardship on operations. The Postal Service countered, and the District Court and 3rd Circuit Appellate Courts agreed, that requiring the employer to bear more than a de minimis cost to provide a religious accommodation is an undue hardship under the Supreme Court’s prior doctrine in Trans World Airlines v. Hardison.

In reversing the lower courts, the U.S. Supreme Court noted that many lower courts incorrectly apply “de minimis” language as the standard for assessing accommodations. Instead, they should look to Title VII which states an “undue burden [is one that results in] substantial increased costs in relation to the conduct of a particular business.” While an exhaustive list of what meets this threshold was not provided, the Court did share what does not constitute an “undue burden,” including: temporary costs, voluntary shift swapping, occasional shift swapping, and administrative costs.

A concurring opinion, coauthored by two justices, argued that the impact on coworkers should be considered and could tip the scale in favor of finding an “undue burden” given the difficulties of finding and retaining workers. Groff was remanded to the trial court, so this analysis was not applied.

As they can no longer rely on the prior de minimus test, employers should work closely with employment counsel to analyze an employee’s request for a religious accommodation before determining whether granting the request would represent an undue hardship.

Groff v. DeJoy, Postmaster General, 2023 U.S. LEXIS 2790
Trans World Airlines, Inc. v. Hardison, 432 U.S. 63 (1977)

The cases of interest this quarter include cases interpreting the “bump up” provision in the directors’ and officers’ liability policy, which has been a contentious issue. We also review cases regarding related acts, another topic with continuing legal developments. We also address several cases involving SPACs, and cases dealing with notice issues and various policy exclusions. We also review a duty of oversight case that applies the concept to corporate officers, not just directors. And we review cases under the Illinois Biometric Privacy Act.

The Q1 2023 Legal & Claims Quarterly Review is available here.

Legal & Claims Review Archive

A suit commenced by both a shareholder of a special purpose acquisition company (SPAC) and a shareholder of the go-forward de-SPAC company was dismissed on the basis that the plaintiffs did not have standing under the securities laws to sue for alleged misrepresentations made by the pre-merger private company.

A SPAC and a used car consignment company announced in October 2020 their intentions to enter a merger. Between the public announcement of the proposed merger and the SPAC shareholder vote approving the transaction, officers of the consignment company made a series of investor presentations that, according to plaintiffs, included materially false and misleading statements. The consignment company claimed that it had the industry’s only consignment-to-retail model, its clients were priced on a flat-fee basis which boosted the company’s gross profit per unit (GPU), it had “superior unit economics,” a “deep pool of sourcing partners,” and the company operated with “limited capital risk.”

However, following the merger, the go-forward company made a series of disclosures that allegedly revealed misstatements made prior to the merger. On March 15, 2021, the CEO disclosed that the company “had acquired so much excess inventory that it was unable to effectively process all of the vehicles,” creating a “log jam” in inventory that negatively impacted the company’s GPU. The CEO also stated that, “[f]or the fourth quarter of 2020 and continuing during the first quarter of 2021 to date, one of our corporate vehicle sourcing partners has accounted for over 60% of our vehicles sourced.”

The company’s share price fell upon this news, as well as additional disclosures. Shareholders, both those that owned SPAC shares and those that purchased after the de-SPAC, initiated a putative securities fraud class action against the public company and its officers.

The defendants moved to dismiss on the grounds that plaintiffs lacked standing to assert the statutory claims. The court, in granting the motion to dismiss, concluded that that the plaintiffs lacked standing to assert Section 10(b) claims under the Securities and Exchange Act of 1934 due to the “purchaser-seller” rule, which limits the class of plaintiffs to “actual purchasers or sellers of securities.” Relying upon appellate court precedent, the court cited authority holding that “purchasers of a securities of an acquiring company do not have standing under Section 10(b) to sue the target company for alleged misstatements the target company made about itself prior to the merger between the two companies.” The court found that plaintiffs “fail to establish that they bought and sold securities about which the misstatements were made.”

The court also ruled that the plaintiffs lacked standing to assert claims under Section 11 and 12(a)(2) of the Securities Act of 1933 Act, because the plaintiffs failed to allege that they purchased shares traceable to the registration for the merger transaction. The court further rejected the plaintiffs’ argument that the merger effectively transformed the SPAC shares into shares of the newly merged company, as that did not change the applicable registration statement pursuant to which the plaintiffs bought their shares.

While the court granted the motion to dismiss, it did so without prejudice. Following the dismissal, a new amended complaint was filed in which plaintiffs are hopeful to overcome their prior pleading obstacles.

Read more insights like this in the latest edition of the Legal & Claims Review.

In re Carlotz, Inc. Sec. Litig., 2023 U.S. Dist. LEXIS 57126 (USDC SDNY, 2023)

On June 1, 2023, the U.S. Supreme Court issued a much-anticipated decision in Slack Technologies, LLC v. Pirani—an appeal concerning the scope of Section 11 of the Securities Act of 1933 and its application with respect to direct listings.

The Court sided with the defendants in holding that Section 11 requires plaintiffs to plead and prove that they bought shares registered under an allegedly defective registration statement. This requirement is contrary to the Slack plaintiff’s and Ninth Circuit Court of Appeals’ position that Section 11 more broadly permits plaintiffs to sue over other securities not registered under a defective registration statement—such as unregistered shares that became publicly tradeable once a direct listing-related registration statement was filed—so long as those other securities “bear some sort of minimal relationship to [the] defective registration statement.” The Court’s decision all but forecloses the ability of a plaintiff to bring a Section 11 claim tied to a direct listing, in which both registered and unregistered shares contemporaneously flood the public market once the direct listing becomes effective, making it practically impossible for a would-be plaintiff to ascertain whether shares that he or she purchased after such a direct listing were registered or not.

Whether this ruling makes direct listings more common remains to be seen. Direct listings have been rare with only a dozen or so in the past several years. Most private companies looking to go public lack the cash resources needed to forgo a traditional IPO, in which investment bank underwriters generally require company insiders to consent to “lockup agreements” that prohibit such insiders from selling unregistered shares that they might own (e.g., from pre-IPO stock awards) for a specified period.

Perhaps a possible result is that Slack will reinforce arguments made by the defense bar—with some traction in federal appellate decisions (one of which was cited with approval by the Supreme Court in Slack)—that it is virtually impossible for plaintiffs to bring Section 11 claims tied to post-IPO secondary public offerings. In secondary offerings, much like the direct listing in Slack, the market is comprised of certain shares that are traceable to an allegedly defective secondary offering registration statement and many other shares that are not. But, unlike direct listings, secondary public offerings are extremely common and Slack thus could have dramatic implications extending far beyond relatively novel and uncommon direct listings. To put it in perspective, the approximately $153.5 billion raised in 2021 core U.S. IPOs marked the most core U.S. IPO funds raised in any given year in history—but that amount paled in comparison to the $224.7 billion raised in post-IPO secondary public offerings in the same year.¹

Regardless of the merits of any Section 11 claim, and particularly given Section 11’s draconian liability provisions and the potentially substantial defense costs that are incurred simply to achieve dismissal of a Section 11 lawsuit, insureds should regularly audit their directors’ and officers’ liability insurance policies to ensure optimized coverage.

¹ https://www.sifma.org/wp-content/uploads/2022/07/CM-Fact-Book-2022-SIFMA.pdf

Directors and officers (D&O) insurance was at the forefront of two recent high-profile bankruptcy court decisions. Those diverging decisions highlight the importance of carefully crafted language in D&O policies.

Emanating from FTX’s collapse and resulting bankruptcy, founder Sam Bankman-Fried sought to lift an automatic stay imposed by 11 USC §362 to help fund his defense costs in connection with various proceedings. He sought a “comfort order” seeking to utilize the D&O policy proceeds, arguing that the automatic stay in bankruptcy does not prevent him from accessing policy proceeds for payment of his defense costs and that, even if it did, the stay should be lifted because he would suffer substantial and potentially irreparable harm without access to FTX’s D&O policies. FTX and its creditors opposed the motion on various grounds. Despite the policy containing a) a priority of payment provision and b) bankruptcy waiver provision, the court – in an infrequently observed decision - denied Bankman-Fried’s motion without prejudice.¹

Conversely, in another high-profile bankruptcy, Silicon Valley Bank’s (SVB) bankruptcy proceeding also resulted in a D&O insurance decision. Recently, the bankruptcy court issued an order permitting D&O’s of SVB to tap into their $210 million D&O insurance tower. The decision was issued over objections of SVB’s unsecured creditors committee. The court found that cause existed to lift the stay under 11 USC § 362(d) to allow D&Os to access proceeds of D&O policies to fund their defenses in covered actions. Further, the court found that the D&Os were entitled to rely upon the priority of payment provision in the policy to fund their defense.²

These two cases highlight 1) the issues that can arise when insureds try to access policies during bankruptcy; and 2) importance of ensuring the bankruptcy provisions in a D&O policy are properly crafted to best address an uncertain litigation environment.

¹ In re: FTX Trading Ltd., et al., 22-11068-JTD (Bankr. DE; April 17, 2023)
² In re SVB Fin. Grp., 2023 Bankr. LEXIS 1339 (Bankr. SDNY 2023)

The Legal & Claims practice within the Financial Services Group at Aon has published the nineteenth edition of the Year in Review.

The 2022 Legal & Claims Year in Review is available here.

The U.S. Securities and Exchange Commission (SEC) adopted Rule 10b5-1 in 2000. Under that Rule, company insiders unaware of material, non-public information (MNPI) can enter into pre-arranged trading plans that, subject to certain conditions, provide such insiders with an affirmative defense to insider trading liability—even if the trades under such plans ultimately are made when the insider actually does possess MNPI.

Given Rule 10b5-1’s affirmative defense provision, paired with the fact that internal corporate communications concerning the propriety of entering into and trading under Rule 10b5-1 plans often involve privileged advice from in-house counsel that generally may be shielded from production in response to subpoenas or litigation discovery requests, it is not surprising that the SEC and U.S. Department of Justice (DOJ) have been hesitant to sue individuals over unscrupulous 10b5-1 trading practices. Indeed, the Wall Street Journal reports that only three actions were brought in the first two decades after Rule 10b5-1 was enacted. Recently, however, the SEC and DOJ appear to have begun bucking that trend.

First, in large part to curb perceived abuses of Rule 10b5-1, the SEC revamped Rule 10b5-1 through amendments that were finalized in December 2022, which are expected to become effective later this year, and those amendments augment the Rule’s requirements.

Second, it is evident that the SEC and DOJ recently have been monitoring perceived Rule 10b5-1 abuses. For example, in September 2022, the SEC brought insider trading claims against senior officers of a Chinese technology company whom the SEC found had established a 10b5-1 trading plan after learning MNPI. In settling such claims, the SEC imposed on each officer a civil penalty of several hundred thousand dollars. Likewise, in December 2022, a publicly traded car rental company disclosed that it had received a grand jury subpoena from the DOJ seeking documents concerning certain of its directors’ and officers’ 10b5-1 plans and trades, as well as an SEC subpoena seeking similar documents. In March 2023, both the SEC (civilly) and DOJ (criminally) charged a public healthcare company’s chief executive officer for insider trading based on sales that he made pursuant to a trading plan that he allegedly entered into while in possession of MNPI. The DOJ described this “groundbreaking” prosecution as “the first time” that it had “brought criminal insider trading charges based exclusively on an executive’s use of 10b5-1 trading plans.”

Time will tell whether these recent SEC and DOJ activities mark a new enforcement trend in which government claims against individuals over 10b5-1 trades become common. While such insider trading claims, if proven, might trigger certain coverage exclusions in a directors’ and officers’ (D&O) liability insurance program, for now, directors and officers should regularly audit their D&O polices to maximize the potential coverage available to them in the event that they have to defend against insider trading claims.

If you have questions about your coverage or are interested in obtaining coverage, please contact your Aon broker.

The Financial Services Group at Aon’s Q2 2023 EPL Advisor includes insights on employment practices risk issues, with particular focus on legal trends and law changes, the evolving marketplace, and class action claims.

The EPL Advisor can be accessed here.

The U.S. Bankruptcy Code allows debtors to sell their assets quickly and efficiently in what is known as a Section 363 sale. This process has become increasingly popular in recent years, as companies considering bankruptcy (as well as their creditors and equity holders) seek to maximize value and minimize disruptions.

This insight takes a high-level look at 363 sales to clarify why it is a popular filing route, as well as its potential pitfalls.

The Section 363 asset sale is the preferred bankruptcy route for corporate debtors that are in financial distress but do not want to cede control to a court-appointed trustee (Chapter 7) or plan on emerging from bankruptcy after restructuring debt (Chapter 11 reorganization). There are several reasons that debtors, creditors, and buyers use 363 bulk asset sales, including but not limited to:

• Dwindling cash reserves and a need to liquidate quickly; and
• Significant liabilities and the nature of the business makes it difficult for prospective buyers to conduct due diligence in the desired time frame.

To qualify for a 363 sale, a debtor must meet certain requirements:

• The assets being sold must be deemed to be necessary for the debtor’s continued operations;
• The sale price must be at least as high as all offers received prior to filing bankruptcy (in some cases, the court may require the debtor to provide notice to other potential bidders and give them a chance to compete); and
• Finally, the debtor must obtain court approval, which typically involves showing that the sale is in the best interests of the creditors and the debtor.

Risks of 363 Sales of Assets

While the speed and efficiency of a 363 sale can offer significant advantages, those same characteristics create risks. One is that the speedy process may not allow for sufficient time to market assets or solicit competing bids, resulting in a lower price than what could be achieved through a traditional bankruptcy sale. Additionally, the debtor may be required to sell assets that it would have preferred to retain. Finally, the speed of the process can also make it more difficult to identify and address any legal issues or liabilities associated with the assets being sold (though the buyer retains favorable protections given to purchasers in bankruptcy).

Overall, 363 sales can be powerful tools for companies who need to liquidate assets quickly within the favorable parameters of the bankruptcy process. Be sure to discuss the benefits and potential pitfalls of the process with bankruptcy counsel.

Read more at D&O Considerations in a Chapter 7 Liquidation or Chapter 11 Restructuring.

There are generally four categories of securities class actions (SCAs) that resulted from the COVID-19 pandemic:

• Suits against companies that experienced an on-site outbreak;
  
• Suits against companies that sought to profit from the pandemic;
  
• Suits against companies that experienced disruption to their operations and financial performance due to the pandemic; and
  
• Suits against companies whose performance soared during the pandemic but now face challenges.
  

A fitness company that manufactures and produces stationary bikes and treadmills is facing a SCA that falls into the fourth category.

The pandemic resulted in an exponential increase in demand for the manufacturer’s products. However, the company experienced supply chain issues and substantial backlogs in deliveries. By early 2021, demand began to wane as COVID-19 vaccines became more widely accessible and brick and mortar gyms began reopening. The plaintiff alleges that the defendants hid the true nature of the declining demand from investors and publicly stressed that its supply chain investments were necessary and appropriate given sustained demand for its products. The complaint further alleged that the individual defendants sold company stock at inflated prices due to the declining demand.

In granting the defendants’ motion to dismiss, the court noted that many of the alleged false statements pronounced by the defendants were accompanied by specific warnings detailing “how the COVID-19 pandemic could potentially affect the company’s business, which unlike many other businesses, viewed the lessening of restrictions as a material risk rather than as an opportunity for growth.”¹ The court also determined that other alleged improper statements were unactionable corporate puffery, and that the plaintiff failed to plead falsity regarding any of the challenged statements.

The court dismissed the action but left open the possibility for the plaintiff to file an amended complaint. This and other COVID-19 related SCAs demonstrate that specific attention to cautionary language in public filings and satisfying the safe harbor provision of the Private Securities Litigation Reform Act may prove helpful in defeating securities fraud claims. Other related SCA claims have been filed recently and Aon will continue to monitor the latest developments.

¹ Robeco Cap. Growth Funds Sicav â Robeco Glob. Consumer Trends v. Peloton Interactive, Inc. 2023 U.S. Dist. LEXIS 55626, *38 (USDC SDNY 2023)

Average Price Per Million decreased 24.9 Percent in the First Quarter

Average Change for Primary Policies with Same Limit and Same Deductible decreased 7.9 Percent

First Quarter Key Metrics and Highlights

• Average price per million decreased 24.9 percent compared to the prior-year quarter.
  
• Price per million for clients that renewed in both Q1 2023 and Q1 2022 decreased 22.3 percent.
  
• 80 percent of primary policies renewing with the same limit and deductible experienced a price decrease; 9 percent had a price increase.
  
• Overall price change for primary policies renewing with same limit and deductible was down 7.9 percent.
  
• 98.6 percent of primary policies renewed with the same limit.
  
• 77.5 percent of primary policies renewed with the same deductible.
  
• 77.5 percent of primary policies renewed with the same limit and deductible.
  
• 94.4 percent of primary policies renewed with the same carrier.
  

On May 1st, the Financial Services Group at Aon published the Pricing Index for Public D&O insurance for the three months ended March 31, 2023. The pricing index tracks premium changes relative to the base year of 2001.

The Pricing Index decreased to 1.84 from 2.45 in the prior-year quarter, the fourth quarterly decrease since Q4 2017. The average cost of $1 million in limits decreased 24.9 percent compared to the prior-year quarter.

The FSG D&O Pricing Index for Q1 2023 is available here (registration required).

As more companies consider reductions in workforce due to economic volatility, the National Labor Relations Board (NLRB) issued a decision calling into question the legality of certain provisions found in many separation agreements. On February 21, 2023, the McLaren Macomb decision held that it is illegal for severance agreements to contain broad confidentiality provision or broad non-disparagement agreements.

The NLRB Board determined that such provisions could result in requiring employees to waive their Section 7 rights under the National Labor Relations Act (NLRA), and merely offering agreements with these provisions violated the NLRA regardless of whether the employee accepted the terms or whether the employer even attempted to enforce the terms. The NLRB felt that the mere presence of the clauses could have a chilling effect on a laid-off employee’s right to raise concerns with the NLRB, assist the NLRB with an investigation, make public statements about the workplace, or assist other employees who are still employed at the company to exercise their rights under the NLRA. All of these are rights protected under Sections 7 of the NLRA.

The decision has broad impact on whether companies should include confidentiality or non-disparagement clauses in workplace agreements. Employees of most private employers are subject to the protections of Section 7 regardless of whether they are unionized. While the matter at hand dealt with a separation agreement, the decision could have implications for other workplace documents such as offer letters, employee handbooks, or proprietary interest agreements if they include similar non-disparagement or confidentiality clauses. Furthermore, while the decision leaves open the ability to allow for these types of clauses, if narrowly drafted, the decision does not give any guidance on how to draft clauses to survive NRLB review. It’s important that employers proceed cautiously and consult with legal counsel before including these clauses in the future.

With the potential for widespread reductions in force at many employers, it is important to consult your employment counsel for advice on how to respond to this new ruling.

On the heels of an $18 million settlement with the Equal Employment Opportunity Commission (EEOC) over claims of retaliation in connection with sexual harassment, a company has agreed to pay $35 million to settle U.S. Securities and Exchange Commission (SEC) charges.

The settlement resolved novel claims that the company failed to maintain adequate disclosure controls to track workplace complaints and that it violated whistleblower protection rules by potentially discouraging former employees’ abilities to communicate with regulators.

The SEC found that a failure to collect workplace complaints prevented management from obtaining sufficient information to understand the volume and substance of workplace complaints. This deficiency, according to the SEC, prevented management from having adequate information to assess whether its public disclosures concerning its workforce were “fulsome, accurate, and not misleading by omission.”¹ The SEC found this conduct to be a violation of Exchange Act Rule 13a-15(a), which requires companies to maintain “disclosure controls and procedures.”

Moreover, since the company included a clause in its employee separation agreements that required individuals to notify management when an employee received a request for information from regulators, the SEC found a violation of Exchange Act Rule 21F-17(a). The rule “…prohibits any person from taking any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation.”²

With workplace conduct continuing to attract attention from plaintiffs and regulators, it remains of utmost importance to ensure robust management liability insurance coverages across your portfolio.

If you have questions about your coverage or are interested in obtaining coverage, please contact your Aon broker.

1 In re Activision Blizzard, Rel. No. 34-96796 (Feb. 3, 2023)
2 Id.

Chapter 11 is the most common bankruptcy filing for public companies, in part because its provisions allow for a corporate debtor to continue business operations and retain some control during the bankruptcy process.¹

A public company debtor filing a petition to restructure under Chapter 11 can no longer manage its debts but still has functional (and potentially profitable) core business units. Generally, functional business units yield more value than the piecemeal sale of their assets.² The bankruptcy process provides necessary “breathing room” to restructure obligations to creditors and create a sustainable balance sheet.

On first filing for Chapter 11, a company is assigned a creditor committee to represent the lenders. Shareholders participate, although not always with voting rights. The committee works with the debtor company on a reorganization plan to eventually exit bankruptcy. These committees can appoint an individual to manage the restructuring. These individuals, sometimes referred to as chief restructuring officers, wield a significant amount of influence during Chapter 11.³

The reorganization plan must reflect Chapter 11’s priorities of “order and fairness” and survive a vote of the creditor committee prior to being confirmed by the bankruptcy court.⁴

If the reorganization succeeds, the debtor company emerges from bankruptcy with sounder finances and potential path to profitability. If it does not, its assets are sold off in liquidation with the proceeds allocated to creditors according to priority - senior secured lenders first, junior lenders next, with common equity holders last in line.

Read more at D&O Considerations in a Chapter 7 Liquidation or Chapter 11 Restructuring

1 https://www.uscourts.gov/statistics-reports/analysis-reports/bankruptcy-filings-statistics/bankruptcy-statistics-data
2 https://www.law.cornell.edu/wex/chapter_11_bankruptcy
3 https://www.lowenstein.com/news-insights/publications/articles/keeping-your-job-as-cfo-when-a-cro-arrives-rosen
4 https://www.law.cornell.edu/wex/chapter_11_bankruptcy

Chapter 7 is the most common type of bankruptcy in the United States for both individual and business debtors. The main purpose of a Chapter 7 bankruptcy is to “liquidate the debtor’s assets in order to satisfy the debtor’s creditors”.¹

After a debtor files a petition for Chapter 7, an injunction called the “automatic stay” takes effect, preventing certain creditors from acting upon the debtor company’s assets. The stay allows for an orderly distribution of assets to creditors by avoiding a “race to the courthouse”.² The court will appoint a Chapter 7 trustee, who is tasked with collecting and selling debtor property, distributing the proceeds to creditors and closing the estate.³ The allocation of sale proceeds is governed by the priority of creditors’ rights, with the holders of the lowest risk / lowest upside assets first in line to collect from the estate.⁴ Proceeds first go to creditors holding the most senior secured debt, followed by junior debt holders. Creditors that hold equity (i.e., shareholders) are typically last, if anything remains. As there is no repayment plan, once assets are fully liquidated and the debtor is discharged by the court, the bankruptcy process is concluded.

The Chapter 7 process is preferred for individual debtors and small businesses as it is simple and inexpensive. These same features, however, makes it less attractive to other debtor entities, such as public corporations. Liquating in this way reduces the likelihood of creditors receiving “top dollar” from sales proceeds as the trustee may lack the industry knowledge and contacts that would find the best buyers for the debtor’s assets.

Read more at D&O Considerations in a Chapter 7 Liquidation or Chapter 11 Restructuring

1 https://www.uscourts.gov/statistics-reports/analysis-reports/bankruptcy-filings-statistics/bankruptcy-statistics-data
2 https://www.law.cornell.edu/wex/chapter_11_bankruptcy
3 https://www.lowenstein.com/news-insights/publications/articles/keeping-your-job-as-cfo-when-a-cro-arrives-rosen
4 https://www.law.cornell.edu/wex/chapter_11_bankruptcy

Average Price Per Million, Adjusted for Certain Items, decreased 17.8 Percent in the Fourth Quarter

Average Change for Primary Policies with Same Limit and Same Deductible decreased 5.1 Percent

Fourth Quarter Key Metrics and Highlights

• Average price per million decreased 15.3 percent compared to the prior-year quarter: price per million, adjusted for certain items, decreased 17.8 percent.
  
• Price per million for clients that renewed in both Q4 2022 and Q4 2021 decreased 17.6 percent.
  
• 65 percent of primary policies renewing with the same limit and deductible experienced a price decrease; 9 percent had a price increase.
  
• Overall price change for primary policies renewing with same limit and deductible was down 5.1 percent.
  
• 96.5 percent of primary policies renewed with the same limit.
  
• 82.9 percent of primary policies renewed with the same deductible.
  
• 80.6 percent of primary policies renewed with the same limit and deductible.
  
• 97.1 percent of primary policies renewed with the same carrier.
  

On February 6th, the Financial Services Group at Aon published the Pricing Index for Public D&O insurance for the three months ended December 31, 2022. The pricing index tracks premium changes relative to the base year of 2001.

The Pricing Index decreased to 1.71 from 2.02 in the prior-year quarter, the third quarterly decrease since Q4 2017. The average cost of $1 million in limits decreased 15.3 percent compared to the prior-year quarter.

However, the Q4 2022 results were impacted by a large client that purchased an 18-month program in Q2 2021 and, as such, was not in the prior-year quarter. Excluding this client, the Pricing Index decreased 17.8 percent in Q4 2022.

The FSG D&O Pricing Index for Q4 2022 is available here (registration required).

Electric vehicle (EV) and adjacent companies, such as lithium battery manufacturers, and their respective directors and officers (D&Os), have been frequent targets of securities class action litigation over the past four years. Many EV companies that have gone public during that window did so through deSPAC transactions, and the numbers speak volumes. Of the approximately 70 securities class actions brought against SPAC or deSPAC entities since early 2019, 16 of them—nearly 25%—were brought against EV companies and their D&Os, among other deal participants.

Equally notable is the plaintiffs’ success rate in these securities class actions. Of the four deSPAC-related class actions brought against EV companies in which motions to dismiss have been decided, at least some of the plaintiffs’ claims have survived in every such case. For example, on October 20, 2022, a California federal court declined to dismiss securities fraud claims under Section 10(b) of the Securities Exchange Act of 1934 brought against an electric car manufacturer and its D&Os concerning the defendants’ alleged misrepresentations about customer reservations for a particular electric vehicle. Absent an early resolution, the claims that have survived motions to dismiss in these cases will proceed into the likely prolonged and expensive discovery that could increase the settlement value of such cases.

Beyond federal securities class actions, EV companies and their D&Os have been targets in other significant litigation and related matters, including shareholder derivative lawsuits and actions brought by the Securities and Exchange Commission (SEC) and Department of Justice (DOJ). For example, the SEC secured a $125 million settlement with an EV company and the DOJ recently secured a securities fraud conviction against the same company’s CEO.

The frequency and severity of the foregoing litigation underscore the risks that EV companies and their D&Os face and the need to put in place robust D&O insurance to help mitigate such risks.

Like other D&O markets, Bermuda experienced a move from price increases to decreases in Q2 2022. For firms in the commercial sector with positive risk characteristics this trend was accelerating through the latter part of the year.

The launching of new insurers or platforms of established insurers over the past 24 months has resulted in Bermuda currently having a potential total of 19 market participants. This record level, while contributing to improved premium levels for firms based upon simple supply and demand, has also increased the stability of the Bermuda market.

This increased number of Bermuda insurers also assisted in developing a greater market appetite for emerging or more challenging areas of risk transfer. Previously renowned as a lead DIC or excess D&O market for F500 clients, Bermuda can now offer niche primary terms on ABC placements for digital asset companies and other hard-to-place business, alongside the more traditional Side A products where Bermuda is recognized as market-leading.

Bermuda is also a major participant within the Employment Practices Liability and Wage & Hour sectors, illustrated by the fact that it is the only market of size and substance for the Wage & Hour product. Adverse claims development arising from these coverages has resulted in premium increases trending upwards in the 5% to 10% range by the end of 2022, simultaneously necessitating some primary and low excess carriers to re-evaluate limits offered. The ever-changing claims landscape has resulted in a robust set of questions from underwriters. Retentions have also been pushed upwards where underwriters feel more exposed.

Aside from the traditional products referenced above, certain Bermuda carriers also provide significant and valuable management liability capacity across the Private Equity, Hedge/Asset Management and Insurance Company disciplines, often with a blended structure encompassing multiple lines.

Expectations for the 2023 D&O market from several Bermuda sources range from stabilization to continued downwards pricing pressure, although the reality will likely be somewhere in between. Importantly and of benefit to buyers, there have been no voiced concerns around breadth of coverage or available limits of liability. As a result, the surplus supply in the commercial section will likely result in continued premium decreases, albeit perhaps not so severe as in the past.

One key factor to watch in 2023 will be the behavior of the major global primary D&O markets. The C-suite level of certain key insurers have indicated a concern that too much D&O rate was given back far too quickly in the past 24 months. Whether or not this influences their premium outlook remains to be seen, although any wholesale adjustment of primary pricing will likely also impact the views of excess insurers, including those in Bermuda.

Read more about management liability marketplace trends as we head to 2023 here.

2022 saw continued flexibility by companies concerning employees working remotely. While this environment is generally a continuing dynamic among companies, the internal controls around smart work reality are relevant for fidelity/crime insurers. Companies should thoughtfully prepare for inquiries from the market about employee dishonesty, computer crime, and social engineering exposures, including questions about VPN usage and general security measures involving employees’ remote computer system access. Details of working arrangements for employees in critical business departments, treasury functions, including fund transfers and securities movements/processing, for example, are also of interest. The ability to show and explain how your company is preparing for potential phishing and social engineering exposures is also important.

The market continues to settle down from a pricing perspective compared to 2021, and we have seen consistency in the underwriting of fidelity/crime programs within the United States, London and Bermuda markets. In 2021 and throughout 2022, most policies that may have had inadvertent cyber-related coverage saw that cover removed from the crime programs, including theft of information, destruction of data, reconstruction costs related to the destruction of data, and extortion cover. The market has seen an increased frequency of social engineering notifications; however, most significant fidelity/crime losses continue to involve employees.

The availability of comprehensive coverage terms remained prevalent in the market for kidnap-ransom programs. Underwriters have significantly limited coverage in Russia and Ukraine. Cyber extortion is now excluded from kidnap-ransom programs. Pricing remains relatively stable but highly dependent upon analyzing the exposure information presented to the underwriters. Exposure to high-risk territories generally leads to an upward premium trend.

We remain optimistic heading into 2023 for the fidelity/crime products within the financial institution and commercial sectors. There will likely be continued market pressure on rates; however, the availability of viable market alternatives should continue to offer clients options.

We are equally optimistic for the kidnap-ransom product, as capacity is substantial and crisis management firms are well-prepared to deal with the ever-changing environment.

Read more about management liability marketplace trends as we head to 2023 here.

Fiduciary liability insurers are concerned with a myriad of class action litigation risks.

The alleged use by defined benefit plan sponsors of outdated mortality tables is an issue we observed in 2022. Since 2018, 20 cases have been filed that challenge purportedly outdated actuarial and interest rate assumptions that employers use to calculate certain optional Defined Benefit pension formats (e.g., joint and survivor benefits), thus failing to account for changes in life expectancy and thereby depriving plan participants of the appropriate level of benefits. Notably, one of these cases settled for $60M.

The purported failure by health plan sponsors to provide timely and adequate notices under the Consolidated Omnibus Budget Reconciliation Act (COBRA) to former participants also poses a litigation risk. Failure to provide timely and adequate notice may subject the employer to certain penalties and excise taxes. Since 2016, over 55 COBRA Notice suits have been filed. While 30 of these suits have resulted in settlements, only three have settled for more than $1M, and most have been resolved for relatively nominal or ‘undisclosed’ amounts.

The most significant concern, however, remains the continued frequency and severity of excessive fee litigation. Excessive fee cases, which generally focus on fees that 401(k) and 403(b) plan participants pay for investment management or administration, generally allege that plan fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) by overpaying for third-party plan administration or investment services. Plaintiffs typically contend that fees are excessive relative to performance. Over 70 excessive fee cases were filed in 2022 alone.

These factors are the driving force behind a continued firming of the fiduciary liability marketplace in 2022 that included reduced capacity, increased pricing, higher retentions, and heightened underwriting scrutiny.

With excessive fee litigation still a concern, it is anticipated that fiduciary liability insurers will continue to manage capacity while requiring a large excessive fee or mass/class retention. Pricing, however, is likely to stabilize by mid-2023 because of rate increases imposed over the past 18-24 months, the excessive fee or mass/class retentions (as retentions have been the avenue that insurers have cited as most appropriate for managing the excessive fee exposure), and the increased competition from several new market entrants for primary and low excess layers.

Read more about management liability marketplace trends as we look ahead to 2023 here.

The EPL insurance market has been experiencing a flattening of pricing, with the average increases falling as 2022 progressed.

At the onset of 2022, there was significant concern surrounding vaccination mandates and employers’ struggles with evaluating Americans with Disability Act (ADA) and religious accommodation requests seeking to avoid any corporate vaccine mandate. However, once the federal vaccine mandate was struck down, many employers changed their strategy and eliminated any proposed vaccine mandate. As a result, the wave of anticipated claims did not materialize on the expected scale, although there were occurrences in certain industries.

According to our benchmarking, pricing stabilized near +10% early in the year. There was a brief period when the average pricing improved to closer to +5%, but later in the year there was an upward trend with average pricing moving back to between +5 and +10%.

Return to office, diversity, equity, and inclusion (DEI) efforts throughout an organization, including in the boardroom, and workforce management issues have been the areas of greatest focus by underwriters. The workplace is increasingly complex, and underwriters are paying close attention to how employers juggle how best to acquire and retain diverse talent, compensate them fairly without running afoul of pay equity issues, and manage the growing potential of a recession and associated layoffs.

These newer trends have caused fewer issues for carriers than traditional sources like sexual harassment, age discrimination, and disability discrimination. Overall, claims frequency has been down but claims severity has increased, especially in jurisdictions like California, New York, and New Jersey. As a result, as pricing increases have flattened, some carriers are struggling with profitability.

With the hiring of an additional 450 positions and the anticipated change in leadership at the Equal Employment Opportunity Commission (EEOC) hiring, expect an increased focus on discrimination claims based on color and LGBTQ+ status in 2023. DEI matters also remain top of mind, and companies whose CEOs make public, verifiable statements surrounding intent and strategy would likely receive more favorable treatment from underwriters.

In terms of capacity and pricing expectations for 2023, it’s possible some of our larger Bermuda trading partners may restrict capacity because of increased claims severity experienced during 2022.

Read more about management liability marketplace trends as we look ahead to 2023 here.

Early in 2022, we observed signs of pricing improvement and stabilization of terms, but also continued pressure on each of the individual lines of insurance amid ongoing COVID-19-related concerns relating to financial stability, workforce challenges, escalating defense costs and litigation trends. A deceleration of de-SPAC transactions quickly materialized mid-year and insurers were faced with focusing on growth outside of the transactional arena. The result was enhanced renewal competition and rapid pricing improvement as the year progressed.

Insurers continued to scrutinize financial conditions, return to work protocols and vaccine mandates, social engineering controls, and fiduciary liability excessive fee exposure. While insurers were concerned about pandemic-related claims and bankruptcies, EPL vaccine-related litigation was limited to a few industries, unemployment remained modest, harassment claims decreased, and private company bankruptcy filings hit a ten-year low. Excessive fee fiduciary liability litigation, on the other hand, continued, with filings against smaller plans enduring.

Capacity was stable, with most programs limited to $5M primary limits. New entrants favorably impacted excess layer pricing and stepped in to offer primary capacity on accounts in some of the more challenging industries, including healthcare, higher education, life sciences and sports organizations. Programs in those industries were marketed at a higher rate, resulting in more movement among insurers, but overall, most renewals stayed with incumbents.

Companies with over $1B in revenue continued to see additional D&O entity exclusions or anti-trust or government funding sub-limits or exclusions, depending upon individual risk profile. Retentions were also consistent, except for accounts with adverse loss history, in challenging industries, or for financially distressed companies.

As 2022 progressed rates showed improvement and we expect the private and nonprofit marketplace to be more favorable in 2023. While claim activity across all management liability lines is not likely to decrease, carrier’s books are stable after several years of rate increases, and insurers have aggressive private and nonprofit growth goals. As private and nonprofit clients enter the 2023 renewal cycle, we recommend working closely with your broker to determine automatic renewal or multi-year renewal eligibility, or competitive available renewal options early in the process.

Read more about management liability marketplace trends as we look ahead to 2023 here.

In “Four Steps to Take Advantage of the Softening D&O Market”, the Financial Services Group at Aon discusses strategies and tips to improve underwriting outcomes, including starting early with incumbent meetings, adequately preparing for insurer meetings, exploring new markets, and preparing a strong ESG narrative for D&O underwriters .

Read more

FSG has published the 2022 Q3 Legal & Claims Quarterly Review

Read more

Legal & Claims Review Archive

The Financial Services Group at Aon released a Wage and Hour advisor, which includes insights on employment practices risk issues, with particular focus on legal trends and law changes, the evolving marketplace, and class action claims.

The W&H advisor can be accessed here.

Average Price Per Million, Adjusted for Certain Items, decreased 14.7 Percent in the Third Quarter

Average Change for Primary Policies with Same Limit and Same Deductible decreased 4.0 Percent

Third Quarter Key Metrics and Highlights

• Average price per million decreased 19.9 percent compared to the prior-year quarter: price per million, adjusted for certain items, decreased 14.7 percent.
• Price per million for clients that renewed in both Q3 2022 and Q3 2021 decreased 15.3 percent.
• 46 percent of primary policies renewing with the same limit and deductible experienced a price decrease; 16 percent had a price increase.
• Overall price change for primary policies renewing with same limit and deductible was down 4.0 percent.
• 98.4 percent of primary policies renewed with the same limit.
• 89.8 percent of primary policies renewed with the same deductible.
• 89.8 percent of primary policies renewed with the same limit and deductible.
• 98.4 percent of primary policies renewed with the same carrier.

On October 31st, the Financial Services Group at Aon published the Pricing Index for Public D&O insurance for the three months ended September 30, 2022. The pricing index tracks premium changes relative to the base year of 2001.

The Pricing Index decreased to 1.57 from 1.96 in the prior-year quarter, the second quarterly decrease since Q4 2017. The average cost of $1 million in limits decreased 19.9 percent compared to the prior-year quarter.

However, the Q3 2022 results were significantly impacted by a very large IPO client that purchased a multi-year program in Q3 2021, and as such, was not in the current quarter. Excluding this client, the Pricing Index decreased 14.7 percent in Q3 2022.

The FSG D&O Pricing Index for Q3 2022 is available here (registration required).

One of the critical tenets of directors and officers (D&O) policies is personal liability protection for individual executives and board members from wrongful acts committed – or allegedly committed – as corporate officers. Chief Information Security Officers (CISOs) are increasingly important to corporate leadership teams as cyber risks and disclosures become more heavily scrutinized, so it’s important for them to understand the level of protection offered by D&O policies.

Recent criminal proceedings against a former CISO at a ride hailing company highlight the potential legal and regulatory risks CISOs face in the wake of cyber incidents. Cyber security breaches are complicated matters and regulatory requirements around the breadth and timing of disclosures continue to evolve.

Individuals should conduct a thorough review of their own coverage. However, D&O policies provide protection for directors and officers, when allegations of civil and criminal wrongdoing are brought against them in their capacity as an Insured Person. Insured Person definitions typically do not define what constitutes an “Officer,” relying instead on corporate bylaws and the definition found in Section 16 of the Securities and Exchange Act of 1934. CISOs should actively determine their status as a corporate officer, which could also govern indemnification owed to them by their employers in response to allegations of wrongdoing.

D&O policies typically provide coverage for both indemnified and unindemnified allegations. A critical component of the coverage is defense costs, which include legal fees to defend such matters once the policy is triggered. Claims that are indemnifiable by the company will likely be subject to a retention or deductible prior to any insurance company obligation. These retentions and deductibles can be significant, often in amounts of millions of dollars. This means it’s important that CISOs are clear about the limitations of their corporate indemnity benefits and the policy triggers if or when a dispute around indemnity obligations with their employer, or between their employer and their insurer(s), arises.

As with any directors or officers of a company, CISOs should be thoughtful about overall program limit adequacy. D&O limits, or components thereof, are often shared with the company itself and between all Insured Persons. Coverage options include to purchase a component of coverage dedicated solely to non-indemnifiable coverage for Insured Persons (often referred to as Side A Coverage). Aon’s proprietary A+ Protect Side A Form explicitly includes CISOs as an Insured Persons, taking the first step towards access to policy limits in the event of a covered claim. If you have any questions about coverage, or are interested in obtaining coverage, please contact Aon and we will connect you to a licensed broker.

On October 11, the Department of Labor (DOL) proposed a new rule updating its test for determining worker status under the Fair Labor Standards Act (FLSA). The proposed rule reinstates the “totality of the circumstances” analysis of the “economic reality test,” which was used by the courts for more than seven decades. Under the proposed rule, an employee is defined as anyone an employer “suffers, permits, or otherwise employs to work” and who economically depends on their employer. In contrast, an independent contractor is a worker in business for themselves and not economically dependent on an employer.

The distinction and analysis consider six factors: 1) the opportunity for profit or loss depending on managerial skill; 2) investment by the worker and the employer; 3) the degree of permanence of the work relationship; 4) the nature and degree of control; 5) whether work performed is integral to the employer’s business; and 6) skill and initiative. None of the factors has a predetermined weight which may allow courts to weigh and come to differing determinations. The reinstatement of the “totality of the circumstances analysis” supplants the multi-factor “economic realities test” used during the Trump administration that focused on a worker’s control over their work, and a worker’s opportunity for profit or loss. Public comments will be accepted on the proposed rule for 45 days (or until November 28), and will assist the DOL in adoption of its final rule.

Some employment law firms speculate that the proposed rule may materially reduce the circumstances in which a worker will be classified as an independent contractor and could significantly impact industries that engage, for example, janitors, home-care workers, construction workers, and gig drivers. Contact your Aon representative for additional information.

On August 25, 2022, the U.S. Securities and Exchange Commission (SEC) adopted pay-versus-performance rules (“Rules”). Significantly adding to the current executive compensation reporting regime, the Rules impose new and substantial compensation-related disclosure requirements on most public companies (except for emerging growth companies, registered investment companies and foreign private issuers). While the SEC has stated that the Rules are designed to, among other things, help shareholders assess a company’s executive compensation programs when making voting decisions, the Rules will also provide detailed information to the plaintiffs’ bar and activist shareholders that already scrutinize companies’ compensation disclosures and practices.

More specifically, the Rules require each covered company to include, in its proxy statement for fiscal years ending on or after December 16, 2022, extensive compensation disclosures related to the current and the past two fiscal years. Among other things, the Rules require companies to provide detailed information describing (1) the reported and (for the first time) “actual” compensation of a company’s CEO and average compensation of companies’ other named executive officers; (2) the companies’ and their respective peer groups’ total shareholder returns; (3) the companies’ net income; (4) new and notable disclosures identifying the financial metrics that companies deem most important for linking compensation to company performance; and (5) “clear descriptions” of the relationship between the foregoing compensation and performance metrics. Read more information about the adopted Rules here.

The Rules require extensive calculations and disclosures, in conjunction with robust deliberations among compensation committees, independent consultants and counsel, and a litany of internal functions, including finance and legal. Issuers, directors and officers (D&Os), and outside advisors (including counsel and compensation consultants) should be aware of the potential risks created by the Rules. These parties face risks arising from quantitative and qualitative aspects of the newly required disclosures. They are of the type that could potentially be covered by D&O liability insurance. On the quantitative front, plaintiffs’ lawyers and activist shareholders could bring disclosure-based securities class action or derivative fiduciary duty claims arising from errors made in connection with the new disclosures and the calculations required for compliance. On the qualitative front, plaintiffs’ lawyers and activist shareholders could potentially bring shareholder claims (e.g., for breach of fiduciary duty and corporate waste) alleging a perceived disconnect between earned executive compensation and company performance.

Public companies and their representatives would be wise to bear these new potential exposures. Although, the extent private plaintiffs ultimately bring and prevail on the types of claims discussed above remain unknown at this stage.

FSG has published the 2022 Q2 Legal & Claims Quarterly Review

Read more

Legal & Claims Review Archive

For years, Delaware corporations could eliminate or limit monetary liability for breaches of the duty of care only for directors. Such protections were codified in Delaware General Corporation Law (DGCL) §102(b)(7) and permitted the elimination of directors’ personal liability except for (1) a breach of the duty of loyalty; (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; and (3) any transaction from which the officer derived an improper personal benefit.

Delaware has now adopted significant amendments to its DGCL that would expand the right of a corporation to adopt an “exculpation” provision in its certificate of incorporation to cover not only directors, but now also corporate officers. The expansion of DGCL §102(b)(7) would include the same personal protections as that of directors. However, an important distinction is that corporations may not eliminate or limit officers’ liability for claims brought by or on behalf of the corporation, including shareholder derivative claims. In contrast, corporations currently may exculpate directors for breaches of the duty of care however those claims are asserted, whether directly or derivatively.

All Delaware corporations should consider proposing amendments to their exculpation provisions to extend this protection to corporate officers. Companies engaging in an initial public offering can consider implementing such protections in connection with the new company’s certificate of incorporation. Publicly traded companies may amend their charter to reflect such a provision after a board-sponsored proposal and vote of shareholders. Such developments are likely to sit favorably not only with officers of Delaware corporations but also with D&O insurers.

Average Price Per Million, Adjusted for Certain Items, decreased 6.5 Percent in the Second Quarter

Average Change for Primary Policies with Same Limit and Same Deductible decreased 0.5 Percent

Second Quarter Key Metrics and Highlights

• Average price per million decreased 14.7 percent compared to the prior-year quarter: price per million, adjusted for certain items, decreased 6.5 percent.
• Price per million for clients that renewed in both Q2 2022 and Q2 2021 decreased 7.6 percent.
• 25 percent of primary policies renewing with the same limit and deductible experienced a price decrease; 37 percent had a price increase.
• Overall price change for primary policies renewing with same limit and deductible was down 0.5 percent.
• 97.3 percent of primary policies renewed with the same limit.
• 87.3 percent of primary policies renewed with the same deductible.
• 86.0 percent of primary policies renewed with the same limit and deductible.
• 96.7 percent of primary policies renewed with the same carrier.

On August 1st, the Financial Services Group at Aon published the Pricing Index for Public D&O insurance for the for the three months ended June 30, 2022.

The Pricing Index decreased to 1.57 from 1.84 in the prior-year quarter, the first quarterly decrease since Q4 2017. The average cost of $1 million in limits decreased 14.7 percent compared to the prior-year quarter.

However, the Q2 2022 results were significantly impacted by two very large clients that purchased 18-month programs in Q2 2021, and as such, were not in the current quarter. Excluding these two clients, the Pricing Index decreased 6.5 percent in Q2 2022.

The FSG D&O Pricing Index for Q2 2022 is available here (registration required).

The Supreme Court issued a unanimous decision in Southwest Airlines Co. v. Saxon, holding that cargo loaders are interstate-transportation workers and, therefore, exempt from arbitration agreement enforcement under the Federal Arbitration Act (FAA). In the case, a Chicago-based ramp supervisor for Southwest Airlines filed a federal wage and hour lawsuit on behalf of herself and her coworkers. Southwest then invoked the employees’ arbitration agreement and asked the court to stay or dismiss the claim.

The FAA requires the enforcement of arbitration agreements in employment contracts unless an exception applies. One such exemption applies to “contracts of employment of seamen, railroad employees, and any other class of workers engaged in foreign or interstate commerce.” The Court had to answer whether the ramp workers fell under the residual class of workers engaged in foreign or interstate commerce. They held that cargo loading was inextricably linked with a requirement to move goods across state lines. Because the FAA references “wharfage,” which is a cargo loading facility, they were involved in foreign commerce as contemplated by the Act.

It is important to note that the Court did limit the analysis of class members, requiring that there be a common attribute with one another and the residual clause. Consider discussing with your preferred employment firm to identify when and for which classes of workers this ruling may impede enforcement of its arbitration agreements.

The pendulum may be swinging the other way after a record year of special purpose acquisition company (SPAC) activity. In the face of global unrest, inflation, and significant supply chain challenges, many SPACs are nearing the end of their two-year window to find a merger target. SPACs that complete a de-SPAC transaction under less than ideal circumstances can face liquidity issues as public companies.

An electric vehicle start-up announced in a press release that it filed for Chapter 7 bankruptcy less than a year after going public via a de-SPAC transaction. The press release noted a host of issues that impacted the company, ultimately affecting its ability to secure financing and continue operating.

Given the volatility in the public company market and the economy, other companies could experience a similar predicament. As companies contemplate their options for protection under the United State Bankruptcy Code, attention should be paid to the directors and officers (D&O) insurance program, which could prove to be crucial in the event of a claim.

Ideally, a bankruptcy filing will not trigger the change in control provision in a D&O policy, and therefore the policy will remain in force until a company emerges from bankruptcy.

During the bankruptcy process, more time under a D&O policy is generally preferred, and companies should work with their broker to obtain an extension of the policy period that will secure coverage past emergence. While weighing the need for, and possibly securing, an extension, “run-off” or “tail” pricing should be negotiated before filing.

Run-off is an extension of time to notice claims stemming from an alleged pre-emergence Wrongful Act (as defined in the policy). It is typically priced as a multiple of the annual premium and underwritten on a case-by-case basis. Run-off pricing should be secured throughout the D&O tower and paid before filing, so leave of court is not required. Where possible, excess insurers should follow the run-off endorsement wording issued by the primary insurer to avoid conflicting provisions. If a company is liquidating via Chapter 7, the wording should include wind-down language to cover the individuals involved in the liquidation process.

The D&O insurance market has moderated in the last six months, making additional limits more attainable for many insureds. Where economically feasible, insureds should proactively adjust their limit commensurate with loss analytics to ensure ample coverage in the event of a claim.

Addressing these issues and getting ahead of a bankruptcy filing can provide comfort around a D&O policy in an already challenging time. Aon has a team of professionals prepared to answer your questions and facilitate the process. If you have questions about D&O coverage and the bankruptcy process, contact your Aon broker.

All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.

The Legal & Claims practice within the Financial Services Group at Aon discusses several cases of interest in executive liability and insurance in the latest edition of the Legal & Claims Quarterly Review.

This edition highlights:

• An important legal development in excessive fee litigation resulting from the United States Supreme Court decision in Hughes v. Northwestern.
• Insurance coverage cases interpreting the meaning of Loss under a crime policy.
• Several cases involving interrelated wrongful acts.
• A novel decision involving a special purpose acquisition company (SPAC).
• A case finding a forum selection clause unenforceable.
• Two cases dealing with the Illinois Biometric Information Privacy Act (BIPA).

The 2022 Quarterly Review – First Quarter can be found here.

The Legal & Claims practice within the Financial Services Group at Aon has published the eighteenth edition of the Year in Review. This edition includes case summaries of decisions involving executive liability lines of coverage, including professional liability, cyber-related matters, and general insurance issues as well as corporate governance and securities law.

The frequency of traditional securities class actions declined in 2021. The number of federal filings dropped from 319 in 2020 to 211 in 2021, far below the average of 277 from 2012-2020. However, the number of settlements reached a ten-year high, with a low average settlement amount of $20.5 million. According to “Securities Class Action Settlements—2021 Review and Analysis” by Cornerstone Research, the settlement numbers are elevated due to cases filed in the preceding several years having matured into a settlement posture, and those cases that did settle involved smaller market cap companies with smaller potential damage exposure.

The 2021 Legal & Claims Year in Review is available here.

The Financial Services Group at Aon released an EPL Advisor, which includes insights on the following topics:

Emboldened EEOC Likely to Sue More Employers in 2022: Review why employment firm, Seyfarth Shaw, expects increased discrimination filings against employers in 2022.

EEOC by the Numbers: An update on recently released data from the Equal Employment Opportunity Commission commenting on 2021 statistics and goals.

No More Mandatory Arbitration of Sexual Assault and Harassment Claims: New Presidential Act finds arbitration agreements and joint action waivers unenforceable when there are allegations of sexual assault or harassment and even invalidates pre-existing agreements.

Employee Harassment Still Occurring, Now Remotely: Review of data from AllVoices, an online platform that allows workers to voice concerns, on instances of cyber harassment as employers move to hybrid and full remote working environments.

California Adopts its Own Biometric Rule: A California legislator has introduced biometric legislation similar to that currently in effect in Illinois.

New Rule Allowing Immediate Appeal of Punitive Damage Awards in Florida: Orders granting or denying punitive damages can now be immediately appealed in the state of Florida, saving claimants from the expenses and information disclosures previously required to litigate through an entire trial.

Supreme Court Issues New Rule on Arbitration Award: Learn why motions to confirm, modify, or vacate arbitration awards under the Federal Arbitration Act (FAA) are now more likely to happen in state court and review the findings in the applicable Badgerow case.

State of the Market: Updates on carrier appetite and behavior for EPLI risks and placements.

Single Claimant Claims and Class Claims: Recent examples of judgments and settlements in various industries highlight potential EPLI exposures.

Two appellate courts recently issued rulings that provide significant guidance to companies seeking to adopt federal or state forum provisions in their bylaws. One decision has implications for state-court class actions following their initial public offering (IPO), and the other decision impacts derivative claims.

In Lee v. Fisher, a shareholder of The Gap, a Delaware corporation, brought a derivative action in federal court asserting a proxy-law violation under § 14(a) of the Securities Exchange Act as well as violations of state law.¹ The plaintiff alleged that The Gap and its directors “failed to create meaningful diversity within company leadership” and that the company made misstatements in its proxy statements about its diversity achievements. The Gap moved to dismiss, citing its forum-selection bylaw requiring that “any derivative action or proceeding brought on behalf of the Corporation” be adjudicated in Delaware Court of Chancery. The district court dismissed the action, and plaintiffs appealed.

On appeal, the Ninth Circuit affirmed, noting that under Supreme Court precedent, forum-selection clauses must be enforced except in “extraordinary circumstances.”² The Ninth Circuit articulated three such extraordinary circumstances, one of which plaintiff argued was applicable in this case: enforcing the Forum Bylaw “would contravene a strong public policy of the forum in which suit is brought.” The plaintiff pointed to the Exchange Act of 1933’s (“Exchange Act”) anti-waiver provision and the exclusive federal jurisdiction over Exchange Act claims as evidence that enforcing the Forum Bylaw would violate public policy. The Ninth Circuit rejected these arguments because neither of these statutory provisions expressly stated that refusing to give effect to these provisions would violate public policy. Additionally, the Ninth Circuit noted it was relevant to its analysis that plaintiff failed to “identif[y] Delaware law clearly stating that she could not get any relief in the Delaware Court of Chancery.”³ The Ninth Circuit therefore affirmed because plaintiff failed to carry her “heavy burden” to overcome the forum provision.

However, it is important to note that this decision sets up a potential Circuit split. The Seventh Circuit previously refused to enforce a substantially similar forum provision against a derivative Section 14(a) claim.⁴

Discuss with your broker the value of including a forum selection clause in your bylaws and charters from the view of D&O underwriters as part of risk mitigation.

¹ Lee v. Fisher, 2022 U.S. App. LEXIS 12941 (9th Cir., May 13, 2022)
² Id. at 6
³ Id. at 9
⁴ Seafarers Pension Plan on behalf of Boeing Co. v. Bradway, 23 F.4th 714 (7th Cir. 2022)

Two appellate courts recently issued rulings that provide significant guidance to companies seeking to adopt federal or state forum provisions in their bylaws. One decision has implications for state-court class actions following their initial public offering (IPO), and the other decision impacts derivative claims.

A California appellate court affirmed that a corporate charter provision requiring shareholders to file Securities Act of 1933 (Securities Act) lawsuits in federal court is permissible.

Following Cyan Inc v. Beaver County Employees Retirement Fund¹, the United States Supreme Court held that “[Securities Litigation Uniform Standards Act of 1998] did nothing to strip state courts of their longstanding jurisdiction to adjudicate class actions alleging only 1933 Act violations. Neither did SLUSA authorize removing such suits from state to federal court.” The Supreme Court’s ruling led to a proliferation of Securities Act class actions filed in state courts and dually filed actions in state and federal courts. Corporations responded by adopting federal forum selection provisions designating federal courts as the exclusive forums for Securities Act claims.

The legality of the federal forum provisions (FFPs) was tested in March 2020. The Delaware Supreme Court held that FFPs are facially valid under Delaware law.² State-court trial judges have previously upheld similar provisions in California, New York, Utah, and New Jersey. However, an open question remained whether other appellate courts in other jurisdictions would similarly permit FFPs.

On April 28, 2022, the California Court of Appeal for the First Judicial District affirmed the Superior Court’s decision in Restoration Robotics, becoming the first state appellate court outside of Delaware to consider (and uphold) the enforceability of FFPs.³ In connection with its IPO process, Restoration Robotics specified in its amended certificate of incorporation that the federal district courts of the United States would be the exclusive forum for the resolution of any complaint under the Securities Act. After Restoration Robotics settled its consolidated federal securities class actions, it sought to rely upon the FFP to bar the plaintiff’s lawsuit in state court – setting up the eventual appeal. The appellate court found that the text of the Securities Act does not prohibit corporations from specifying that suits must be brought in federal court.

In reaching its conclusion, the appellate court rejected the plaintiff’s argument, stating that the FFP was unenforceable under the Securities Act. Although the Securities Act expressly provides for concurrent state and federal jurisdiction — and forbids removal of actions asserting only Securities Act claims to federal court — the Securities Act by its plain language “does not prohibit the enforcement of a forum selection clause concerning [Securities] Act claims that is part of a company’s certificate of incorporation.” The plaintiff also argued that, to the extent Delaware law permits FFP’s, it “violates the Commerce Clause and the Supremacy Clause of the United States Constitution” – which the court rejected. Finally, the court rejected the plaintiff’s arguments that the FFP was unenforceable under California law.

The appellate court’s decision is another positive development for companies that wish to protect against having to defend costly and potentially duplicative Securities Act claims brought in state court and, along with the earlier trial court rulings, has significant implications for the directors’ and officers’ insurance industry. There now appears to be a broad consensus that FFPs are valid and enforceable, which should assist in controlling the cost of defending Securities Act claims.

Discuss with your broker the value of including a forum selection clause in your bylaws and charters from the view of D&O underwriters as part of risk mitigation.

¹ Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061, 1078 (2018)
² Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020)
³ Wong v. Restoration Robotics, Inc., 2022 Cal. App. LEXIS 366* (Cal. App., April 28, 2022)

On May 5, 2022, the Department of Justice (DOJ) announced a comprehensive environmental justice enforcement strategy to drive environmental justice and prosecute violators.

The environmental justice enforcement strategy encompasses four principles:

• Prioritize cases that reduce public health and environmental harm to overburdened and underserved communities.
• Make strategic use of legal pursuit avenues (including the Supplemental Environmental Project settlement) such as investigative tools and civil/criminal enforcement actions under the environmental protection laws and other federal laws.
• Search for broad remedies for all civil and criminal damages for impacted communities and individual victims, including fines, penalties, treble damages, remedies to stop violations, clean-up, mitigation, rehabilitation, restoration, and restitution.
• Promote transparency with enforcement efforts and tracking progress to measure results.

Directors and officers (D&O) risk related to environmental concerns is not a new corporate or personal exposure. The recent concern is potential liability for a corporate officer, director, or the Board of Directors considering the high public interest and the broad strategy being followed by the DOJ and other, especially non-U.S., regulators.

Shareholder activists and creative plaintiff’s firms will be monitoring how this issue develops, hoping to identify trends to target corporate boards with litigation related to in any potentially misleading statements or omissions in environmental disclosures and strategies.

Depending on how an investigation or action is framed, it could be expensive to defend, even if ultimately found to be without merit. These exposures can impact a firm’s D&O policy as well as other policies, including coverages for environmental risks. While an environmental (pollution) exclusion on the D&O policy may be commonplace, the application of this exclusion varies depending on its breadth and scope. Further, exclusions and related definitions of Loss could include carve backs for specific claims, like securities cases. Policyholders should take care to examine the exclusions along with the policy provisions around “claim”, “notice”, and “loss” to obtain the broadest available coverage in the market.

D&O underwriters may ask additional questions and request information about the company’s environmental practices and policies. An environmental insurance policy covering remediation and third-party liability arising from pollution conditions may enhance a risk management portfolio and provide additional protection. It is important to start conversations with your insurance broker early.

The Securities and Exchange Commission (SEC) recently brought the issue of climate change to the forefront by proposing disclosure rules for public companies. Governance and ESG professionals at Aon present a detailed review of the SEC’s proposed climate change rules in March 2022’s What Companies Need to Know About the SEC’s Proposed Climate Rules in the U.S. , and the Financial Services Group at Aon discussed the rules’ potential impact on the D&O market and litigation in an April FSG Quick Insight - The SEC’s Proposed Climate Change Disclosure Rules and the Impact on the D&O Market and Litigation.

The Environmental Risk Solutions team, the Financial Services Group, and Governance and ESG professionals at Aon reviewed the harmonization of climate disclosure frameworks in the U.S. and the global climate litigation landscape in 2021’s “Directors’ and Officers’ Liability Update -- The “E” in ESG.”

Employee theft within an organization is not new, and many of the behaviors of individuals who steal or misuse an organization’s assets remain consistent over time. According to the Association of Certified Fraud Examiners (ACFE)’s Occupational Fraud 2022: A Report to the Nations, the top four ‘behavioral red flags of fraud’ were employees:

• Living beyond their means or living a lifestyle not matching their income
• Encountering financial difficulties
• Having an unusually close association with a vendor or customer and
• Having control issues with an unwillingness to share duties

According to the ACFE’s report, nearly half of all frauds occurred within the operations, accounting, executive management, and sales divisions, and 86% involved asset misappropriation. Asset misappropriation fraud is defined as the theft or misuse of an organization’s assets by the individuals entrusted to manage the assets.

What steps can organizations take to mitigate the risk exposure presented by employee theft?

Robust internal controls ground the front line of defense for a company, starting with due diligence during the hiring process. The controls should also ensure monitoring and oversight of all employees, especially those within “sensitive areas” such as treasury, information technology, accounting, vendor management, and client relationship management. The ACFE’s report notes that anti-fraud controls are associated with lower fraud losses and quicker fraud detection but do not eliminate fraud. However, they are useful to benchmark your organization’s internal controls.

The two most common anti-fraud controls were external audits of financial statements and a formal code of conduct, for 82% of the organizations surveyed in the report. These internal controls were already in place at the time the fraud occurred. Other common controls in place for organizations at the time fraud occurred include:

• An internal audit department (77%).
• Management certification of financial statements (74%).
• An external (independent) audit of the internal controls over financial reporting (71%).

Implementing a solid internal control environment sets the foundation for any risk mitigation strategy. Communicating your company’s internal control environment is a benefit in how underwriters view your company’s risk exposure. Insurers consider many factors that impact an organization’s risk profile, including the size and nature of your business. Comprehensive insurance protection, including multi-faceted coverage grants for employee theft, social engineering, computer crime/funds transfer fraud, and loss of money or securities in transit or within a vault, can be achieved with a wide array of insurer partners in today’s market.

If you have any questions about coverage or are interested in obtaining coverage, contact your Aon broker.

The Biden Administration announced an executive order aiming to “ensure responsible development of digital assets”. Various federal and state regulatory bodies are mobilizing quick, such as the U.S. Securities and Exchange Commission (SEC). A recent SEC press release announced that its Crypto Assets and Cyber Unit was almost doubling in size with the addition of attorneys and fraud analysts. The SEC emphasized that this increase in staff demonstrates its commitment to protecting investors in the crypto space and ensuring businesses operate with appropriate cyber controls. The focus on crypto-asset offerings, exchanges, DeFi platforms & protocols, NFTs, and stablecoins is increasing.

The Crypto Assets and Cyber Unit has been responsible for over 80 enforcement actions, resulting in more than $2B in penalties since 2017. The actions have primarily resulted from fraudulent or unregistered offerings or platforms operating in the crypto sector. The division has also increased the number of actions against public companies and other SEC registrants for failure to maintain adequate cyber security controls or adequately disclose cyber-related risks or deficiencies, despite an overall decline in enforcement actions brought against public companies.

According to a report by Cornerstone Research, the 20 enforcement actions in 2021 represents a slowing down of actions when compared to the 29 in 2020, but recent activity suggests this trend is likely to change. The SEC’s 2023 budget justification requested an additional 125 staff members to help “accelerate enforcement actions” and address misconduct with an emphasis on crypto.

In light of the above, it is reasonable to expect an increase in regulatory action and that the institutionalization of crypto will have an increasing impact on the insurance industry. D&O insurance can provide meaningful protections for businesses facing regulatory inquiries, investigations, and litigation. Although it is generally challenging for digital asset businesses to obtain insurance coverage in the current environment, capacity and pricing are gradually becoming more favorable for companies with favorable risk profiles that partner with experienced insurance professionals who have the ability to access the market efficiently. Partnering with an insurance broker can help companies understand the characteristics that distinguish their risk profile, allowing them to navigate insurer uncertainty and avail themselves of available capacity. The Digital Asset practice at Aon has over 60 devoted specialists and is uniquely positioned to provide and service a full suite of commercially viable insurance solutions for businesses operating on the cutting edge of finance and technology.

The Financial Institutions Practice at Aon provides industry-focused solutions for banks and other diversified financial institutions.

If you have questions about coverage or are interested in obtaining coverage, contact your Aon broker.

The U.S. Securities and Exchange Commission’s (SEC) proposed disclosure rules for special purpose acquisition companies (SPACs) that, if adopted, would ensure “greater transparency and more robust investor protections” that “could assist investors in evaluating and making the investment, voting, and redemption decisions for these transactions.” The SEC’s public statement with respect to the proposed rules declared: “functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO. Thus, investors deserve the protections they receive from traditional IPOs, regarding information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, gatekeepers, and issuers."

To further these protections, the SEC proposed, in part, the following:

• Enhanced disclosure requirements to provide additional investor protections in SPAC initial public offerings (IPOs) and de-SPAC transactions to harmonize the reporting rules for de-SPAC transactions with traditional IPOs. For example, additional disclosures about the sponsor of the SPAC, potential conflicts of interest in the de-SPAC transaction, potential sources of additional dilution with certain specific disclosures required in the prospectus, cover page, and summary of registration statements as well as moving information about the private operating company filed by the de-SPAC after the closing into the de-SPAC registration statement.
  
  
• SPACs and SPAC sponsors (including affiliates and promoters), and the targeted private operating companies will be subject to new liability and regulatory standards in the SPAC IPO and in the de-SPAC transaction. For example, the SEC proposed a “blank check company” definition, indicating that the Private Securities Litigation Reform Act of 1995 (PSLRA) safe harbor for financial projections and other forward-looking statements would not be available for SPACs. The proposed rules also include a new safe harbor regulation that states that the SPAC will not be deemed subject to regulation under the Investment Company Act of 1940 (40 Act) and provides additional guidance if the SPAC cannot meet that safe harbor test.

The recent slowdown in SPAC listings is likely a combination of macro market volatility and SPAC sponsors weighing the impact of new legislation. The SEC’s proposed rule regarding underwriter liability for the SPAC sponsor in the de-SPAC transaction resulting in additional time and cost to get a deal done is an onerous provision that increases the pressure to identify target candidates early. The 40 Act safe harbor provision pressures SPACs to close a deal within 24 months of the SPAC IPO. Specific to D&O insurance, it is reasonable to expect underwriting skepticism, which could impact premium and capacity for SPAC transactions. Over the longer term, D&O underwriters are likely to view the increased regulatory requirements as a risk decelerator which could improve D&O pricing for SPACs, which has been otherwise significantly elevated. Additionally, the due diligence which will be required to protect the SPAC sponsor from underwriter liability under the proposed new rules will likely result in improved quality of the transaction – another positive attribute for the D&O underwriting. Over the long term, better deals could come to market, which should give insurers comfort in terms of deploying capital into the segment. Aon’s FSG team will continue to monitor the evolution of the rules and adoption as well as market impact over the coming months.

Average Price Per Million, Adjusted for Certain Items, Increased 15.5 Percent in the First Quarter

Average Change for Primary Policies with Same Limit and Same Deductible Increased 2.1 Percent

First Quarter Key Metrics and Highlights

• Average price per million increased 4.7 percent compared to the prior-year quarter: price per million, adjusted for certain items, increased 15.5 percent.
• Price per million for clients that renewed in both Q1 2022 and Q1 2021 decreased 2.9 percent.
• 8 percent of primary policies renewing with the same limit and deductible experienced a price decrease; 55 percent had a price increase.
• Overall price change for primary policies renewing with same limit and deductible was up 2.1 percent.
• 93.2 percent of primary policies renewed with the same limit.
• 86.3 percent of primary policies renewed with the same deductible.
• 82.2 percent of primary policies renewed with the same limit and deductible.
• 95.9 percent of primary policies renewed with the same carrier.

On May 2^nd, the Financial Services Group at Aon published the Pricing Index for Public D&O insurance for the three months ended March 31, 2022. The pricing index tracks premium changes relative to the base year of 2001.

The Pricing Index increased to 2.45 from 2.34 in the prior-year quarter, the highest Index value since Q1 2004. The average cost of $1 million in limits increased 4.7 percent compared to the prior-year quarter.

However, the Q1 2022 results were significantly impacted by two very large programs, in what is our seasonably smallest quarter, that were not in the prior-year quarter. Conversely, Q1 2021 was characterized by a large number of Initial Public Offerings (IPOs), a market that all but dried up in Q1 2022. Many of these IPOs were Special Purpose Acquisition Companies (SPACs), which tend to purchase two-year programs, and are, therefore, not in the current-year quarter. Excluding these two clients, and the IPOs, the Pricing Index Increased 15.5 percent in Q1 2022.

The FSG D&O Pricing Index for Q1 2022 is available here (registration required).

The Financial Services Group at Aon released a Wage & Hour (W&H) advisor, which includes insights on following topics:

The Federal Vaccine Mandate That Never Was: On January 13, 2022, the U.S. Supreme Court issued a ruling staying the implementation of the COVID-19 Vaccination and Testing Emergency Temporary Standard (ETS). In a 6-3 decision, the Court ruled that the ETS was an unconstitutional overreaching of OSHA’s authority.

Enforceability of Mandatory Arbitration Agreements in California: Multiple California business groups challenged the implementation of AB-51, a bill that invalidates mandatory arbitration agreements that are a condition of employment, but the Ninth Circuit has mostly lifted the injunction imposed by a lower court. Employment firms in California are expecting an immediate appeal to the U.S. Supreme Court.

A Win for Staffing Firm Joint Employers: The Tenth Circuit Court recently heard a case concerning non-signatory enforceability of arbitration agreements and found that in certain instances, arbitration agreements and class action waivers can protect a non-signatory customer or party.

State of the Market: The W&H market has experienced more muted volatility compared to the EPLI market with pricing largely peaking in the 20-percent-plus range. This lack of volatility was mainly driven by the absence of any negative impact from the COVID-19 pandemic and less need for a historic right-sizing in pricing.

Class Claims: Recent examples of settlements in a variety of industries highlight matters that can impact Wage & Hour claims.

The W&H advisor can be accessed here.

In February 2022, the Financial Services Group at Aon released D&O Insurance for Non-U.S. Domiciled/U.S. Traded Companies in 2021, detailing the litigation landscape, rate evolution, program limits, market capacity, and primary carriers for the D&O insurance of U.S.-listed companies domiciled outside the U.S.

These companies are typically subject to higher litigation risk than non-U.S. listed companies, evidenced in recent years through high claims volume, heightening the focus of D&O underwriters. In addition to securities class actions (SCAs), U.S derivative claims against non-U.S. companies have also been a central topic.

While there are indications that the litigation landscape is cooling for U.S.-listed non-U.S. companies, directors and officers should continue to take proactive measures to mitigate risks. Rates stabilization began in Q4 2021, likely from competitive pressure brought by new capacity, which means premium reductions are still possible. It is reasonable to expect this trend to continue in early 2022 for at least the excess level.

On March 21, 2022, the Securities and Exchange Commission (SEC) proposed climate disclosure rules addressing five topics:

• Climate-related risks and materiality
• Climate governance and risk management
• Greenhouse gas emissions
• Climate-related financial information
• Climate-related targets, goals, and transition plan

If adopted, the proposed rules could, while providing investors with “consistent, comparable, and decision-useful information,” increase board exposure, liability, and litigation. Plaintiffs’ firms, especially those fueled by activist shareholders, may pursue litigation against companies and their boards, alleging violations of securities laws and general breaches of fiduciary duty regarding the board’s failure to manage, prepare or report on climate risk. While climate change litigation is not new, the SEC’s role in releasing its significant disclosure requirements is, and so is the potential impact on C-Suite leaders.

A board’s expectation may be that a typical D&O policy would cover any losses arising from the above allegations. However, many D&O policies have some form of exclusion for direct pollution-related exposures, including clean-up costs that, if broadly worded, could impact coverage for a D&O claim arising from climate-related issues. Additionally, other policy issues may be affected, such as the breadth and scope of the investigation and claim definitions, the definition of loss, and more.

Increased preparation and discussions of these proposed rule changes are recommended to help mitigate liability for Directors and Officers. Underwriters are likely to ask climate disclosure questions as part of the underwriting process - specifically, inquiries about a company’s direct exposure (greenhouse gases) (Scope 1), indirect exposure (Scope 2), and supply chain/consumer exposure (Scope 3). The process a company undertakes to formulate the newly required disclosure statements will also be a focus area, for example how underwriters inquire about the methods a company uses to develop its risk factors. Additionally, shareholder feedback to the disclosures will be of interest to underwriters as more investors focus on ESG as part of their overall investment criteria.

Governance and ESG professionals at Aon review the SEC’s proposed rules in detail here.

The Financial Services Group and Governance and ESG professionals at Aon recently reviewed the harmonization of climate disclosure frameworks in the U.S. and the global climate litigation landscape in: “Implications for D&O Litigation From Climate-Related Risk - Aon.”

Fiduciary Liability: Excessive Fee Risk discusses excessive fee litigation trends and some best practices for Risk and Benefit Plan managers.

Excessive fee litigation cases in retirement plans have risen dramatically in frequency and severity putting pressure on the Fiduciary Liability insurance market. Since 2005, excessive fee litigation has grown significantly with plaintiffs’ firms filing more than 300 lawsuits.

The cases generally focus on investment management or administration fees for 401(k) and 403(b) plans and have led to a considerable firming of the Fiduciary Liability insurance marketplace with decreases in capacity, significant increases in pricing and retentions and tightened underwriting criteria.

The full report can be accessed here.

The Legal & Claims practice within the Financial Services Group at Aon highlights several cases of interest in executive liability and insurance.

Cases involving the interpretation of the bump-up, securities and professional services exclusions, and several decisions interpreting the claim, related claim, loss, and securities definitions are reviewed in this issue.

Additional insight into a rescission case and a case involving the Biometric Information Privacy Act (BIPA) is provided. The team also reviews matters relating to breach of duty claims stemming from cyber events and the dismissal and resolution of data privacy matters in the United Kingdom and Canada.

The 2021 Quarterly Review – Fourth Quarter is available here.

This Aon Webinar helps provide an understanding of Decentralized Finance (DeFi), smart contracts, and emerging trends in crypto marketplace. The brokerage community plays a crucial role in helping educate insurers and partners, propelling innovation, and expanding digital asset risk capacity.

Hosts James McCue, Ben Peach and Glenn Morgan from the Digital Asset Solutions Team at Aon, examine this emerging sector, and along with the panelists dig into the benefits and potential risks, discussing the following topics:

• An overview of DeFi and its rapid growth
• Smart contract technology and its use cases
• DeFi’s impact on traditional financial services
• The benefits and risks of DeFi and the role that regulation will play

The panelists simplify complicated crypto concepts, breaking down unfamiliar language and comparing DeFi innovations with legacy financial systems. In addition to covering the DeFi landscape, the session also included discussion on Decentralized Autonomous Organizations (DAOs), Web3, NFTs and the metaverse.

The panelists included:

• Brian Quintenz, former head of the Commodities Future Trading Commission (CFTC), and advisory board member for A16z,
• Andrew Perryman, Senior Principal, Digital Assets, of the Advanced Digital Solutions Group at BNY Mellon, and
• Jorge Pesok, General Counsel and Chief Compliance Officer at Tacen.

The webinar can be accessed here

The Financial Institutions Practice at Aon provides industry focused solutions for banks and other diversified financial institutions.

In February, the Financial Services Group at Aon published the fourth quarter Pricing Index for Public D&O insurance. The Pricing Index tracks premium changes relative to the base year of 2001.

In Q4, the Index increased to 2.02 from 1.73 and the average cost of $1 million in limits increased 16.8% compared to the prior quarter.

Fourth Quarter Key Metrics and Highlights:

• Average price per million increased 16.8% compared to the prior year quarter
• Price per million for clients that renewed in both Q4 2021 and Q4 2020 decreased 1.1%
• Overall price change for primary policies renewing with same limit and deductible was up 3.7%
• 94.4% of primary policies renewed with the same limit
• 85.6% of primary policies renewed with the same deductible
• 80.0% of primary policies renewed with the same limit and deductible
• 96.3% of primary policies renewed with the same carrier
• 11% of primary policies renewing with the same limit and deductible experienced a price decrease – 74% had a price increase

The FSG D&O Pricing Index for Q4 2021 is available here (registration required).

The special purpose acquisition company (SPAC) boom shows no signs of slowing down. In fact, 613 SPAC initial public offerings occurred in 2021 – compared to 248 and 59 in 2020 and 2019, respectively.¹

The SPAC boom, according to U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler’s remarks before the Healthy Markets Associate Conference, led to 181 de-SPAC transactions in 2021 – compared to just 26 de-SPACs in 2019. Given this surge in SPAC activity, Mr. Gensler asks, “which principles and tools do we use to ensure that like activities are treated alike?”²

The chair’s comments suggest a heightened scrutiny to come for SPAC deals. “I believe the investing public may not be getting like protections between traditional IPOs and SPACs,” Mr. Gensler announced.

For example, Mr. Gensler voiced concern that, whether at the time of the initial SPAC blank-check IPO or the de-SPAC merger, information asymmetries, fraud, and conflicts are not adequately mitigated and that SPAC investors are not receiving “the protections they would get in traditional IPOs, with respect to disclosure, marketing practices, and gatekeepers.” As illustrations of the information imbalance, Mr. Gensler pointed, in part, to the possibility of: (1) private investment in public equity (PIPE) investors obtaining access to information that the public has not; (2) retail investors not receiving adequate information about how their shares can be diluted throughout various stages of the SPAC; and, (3) incomplete information based on marketing practices.

As a result, Mr. Gensler remarked that he is currently obtaining input from SEC staff for proposals to close the information gap in SPAC deals by focusing on requirements around disclosure, marketing practices, and liability for sponsors and other gatekeepers to SPAC deals. Comparing SPACs to IPO’s, he concluded “the SPAC target IPO is akin to a traditional IPO” and “like should be treated alike.”

On December 21, 2021 the U.S. Securities and Exchange Commission (SEC) announced that the Nikola Corporation, a publicly traded company created through a special purpose acquisition company (SPAC) transaction, agreed to pay $125 million to settle charges that it defrauded investors by misleading them about its products, technical advancements, and commercial prospects.

The SEC order¹ stated that “from at least March 2020 through September 2020, Milton’s [former CEO of Nikola] statements in tweets and media appearances, individually and taken together, painted a picture of Nikola that diverged widely from its then-current reality.” The order also finds that Nikola further misled investors by misrepresenting or omitting material facts about its business prospects.

Notably, the order also recites that, “in order to preserve the deterrent effect of the civil penalty,” Nikola agrees that, in connection with any Related Investor Action, it “shall not argue that [Nikola] is entitled to, nor shall [Nikola] benefit by, offset or reduction of any award of compensatory damages by the amount of any part of [Nikola’s] payments of a civil penalty in this action.”

This settlement, which reflects the SEC’s heightened scrutiny of SPACs, suggests additional SPAC enforcement actions may occur in 2022.

1 (SEC File No. 3-20687) (December 21, 2021)

On January 3, 2022, the Delaware Chancery Court entered an opinion in a direct action breach of fiduciary duty case (not a securities class action), by denying the defendants’ motion to dismiss. The case involves a novel application of traditional fiduciary duty principles in the special purpose acquisition company (SPAC) context and will generate much discussion.

In the MultiPlan¹ action, Churchill III (the SPAC) merged with MultiPlan Corp, a data analytics firm. After the merger, a short-seller report claimed “… that at the time of the merger, MultiPlan was in the process of losing its largest client, UnitedHealthcare”, which the proxy statement disclosed accounted for about 35 percent² of the company’s revenue. This was, among other things, the plaintiffs’ basis for the breach of fiduciary duty direct action.

The Delaware Chancellor, in deciding the defendants’ motion to dismiss, made the following findings: 1) plaintiffs’ claims were direct, not derivative; 2) the “entire fairness standard of review applies due to inherent conflicts between the SPAC’s fiduciaries and public stockholders in the context of a value-decreasing transaction”; 3) plaintiffs “pleaded viable, non-exculpated claims against the SPAC’s controlling stockholder and directors.”

In coming to these conclusions, the Delaware court commented on a number of the conflicts inherent in SPAC deals. For example, the court held that there were reasonably conceivable allegations that the SPAC board was conflicted because the SPAC’s directors (through their economic interests in the sponsor) “would benefit from virtually any merger — even one that was value diminishing for Class A (public) stockholders — because a merger would convert their otherwise valueless interests in Class B shares into shares of Public MultiPlan.”

The court also held that a majority of the board was conflicted, because they were not independent from Michael Klein (founder and controller of the SPAC).

This case:

• Underscores that courts will parse proxy statements issued in connection with SPAC transactions; and,
• Demonstrates the importance of robust disclosures in a context where a court could apply an entire fairness standard of review.

1 In re Multiplan Corp. Stockholders Litig., 2022 Del. Ch. LEXIS 1 (Del. Ch. January 2, 2022)
2 Churchill Cap. Corp. III, Definitive Proxy Statement (Schedule 14A) (Sept. 18, 2020)