By Gary Osborne, Vice President, Risk Partners
D&O insurance rates continued to rise in 2021. Many believe this result is due to the Supreme Court decision Badgerow v. Walters, which allowed Section 11 suits (Section 11 suits under the Securities Act of 1933 are one of the more common types of litigation against new public companies. In these suits, shareholder plaintiffs allege that there are false and misleading statements in a company’s S-1 registration statement) to be filed concurrently in federal and state court. The frequency and severity of suits that followed sent shockwaves throughout the D&O insurance marketplace.
In less than two years, the quoted price of the primary $10 million of D&O insurance for an IPO company more than quadrupled, and the average self-insured retention (or deductible) went from $2.5 million to $10 million.
In an attempt to avoid concurrent state court litigation, IPO and direct listing companies began to add federal forum provisions to their charter documents. Federal forum provisions allow a company to designate federal district courts as the exclusive venue for claims brought under the Securities Act. In early 2020, the Delaware Supreme Court said those provisions were valid in Salzburg, et al v. Sciabacucchi.
This decision appears to have had a positive impact on these dual filings. In 2019 and 2020, more than 50% of Section 11 IPO filings had cases brought in both state and federal courts. In the first half of 2021 the percentage dropped to 18%.
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