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Shareholder class action exposure risk in challenging D&O market

(Sponsored article) Shareholder class actions have been a significant factor in the explosion of the cost of Directors and Officers (D&O) insurance and the availability of coverage.

Market capacity has long been stretched and listed companies are under increasing pressure to find alternative insurance options.

Despite the changes during COVID-19 where companies and their officers would only be liable for civil penalty proceedings where they have acted with ‘knowledge, recklessness or negligence’ in relation to their continuous disclosure obligations, shareholder class action remains a concern across the board for listed companies.

In Australia, settlement values are wide ranging and depend on a number of factors which include the shareholders participating in the class action, the extent to which the share price drops after the market adjusts for the alleged breach in continuous disclosure obligations, and the period of time the alleged disclosure breach remained uncorrected.

The likelihood of D&O shareholder class action activity remains high in Australia, and for those companies potentially subjected to class actions, the rapid increase in insurers’ premiums coupled with capacity restrictions has resulted in increased scrutiny and reductions in the amount of insurance procured to protect organisations from their exposure to securities class actions.

This additional scrutiny in the D&O market has created a surge in demand for analytics beyond what is typically available.

Modelling the risk and impact

Sophisticated modelling is key to addressing and exposing the level of risk of a shareholder class action, and the resulting impact on availability and coverage of D&O insurance in the local market.

Aon has developed a D&O Side C* exposure modelling solution, the D&O Decoder that provides data and analytics on an organisation’s securities class action exposure and the probability of the event occurring, the nature of their exposure and how their position compares to peers.

* Side C – Securities Entity: Provides indemnity to the company in respect of securities claims brought against the company by security holders (Balance Sheet Protection).

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