A recent report in Lloyd’s List states that the number and severity of claims against directors and officers has been rising, and concludes that greater surveillance of corporate governance is leading to more legal actions, which has led to a steep rise in premiums for D&O coverage.
The report follows the collapse of energy giant Enron, which has already produced several shareholder suits against directors and officers. Estimates of the liabilities for surety bonds and other coverage run as high as $20 billion.
The article cites a warning from Marsh, Inc. that regulators are “demanding more financial transparency and more responsible management of organisational risks.” Shareholders too, are increasingly focused on corporate liability and the standards applicable to directors and officers. Alleged failures to observe proper procedures have produced over 250 lawsuits in the first 10 months of 2001, compared to 201 for all of 2000.
The rise in claims isn’t limited to the U.S. Actions have also been brought by dissatisfied shareholders in Europe, Japan and China. With new regulations coming into force, such as the U.K.’s beefing up the power of its Financial Services Authority, a closer watch is being kept on how corporations are being run, and more transparency is being required in their accounting statements.
This has resulted in a number of companies in the U.S. and Europe being forced to restate their previous results, as was the case with Enron, and has in many cases revealed serious errors and misstatements that in turn have have produced lawsuits.
Lloyd’s List reported that as a result premiums for D&O coverage are on the rise, and insurers are excluding coverage in some areas, notably bankruptcy. They’re also taking a much closer look at corporate accounting practices, and have asserted the right to void policies where serious misrepresentations are found. In such cases the insurance company is in the same position as the shareholders who’ve been misled by faulty accounting.
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