European D&O Insurance Market to Benefit from Governance and Legal Reforms

Directors & officers (D&O) liability insurance in Europe is primed for robust growth given changes to laws governing executive responsibilities and to collective litigation processes. Accounting scandals and corporate governance shortfalls in Europe by companies such as Royal Dutch Shell, Unilever, and Parmalat cost investors billions of Euros in the early years of this decade. In response to the subsequent outrage, governments across Europe have passed laws requiring new disclosures, enhanced shareholder protections, and greater transparency. The recent economic crisis, rife with banking scandals, further propelled these efforts. Integral to these corporate governance reforms are proposed changes to litigation procedures, and most notably toward developing a formal structure for collective action proceedings. The progression toward implementing collective action mechanisms is in varying stages by country, and the degree of liberalization differs among countries. The clear trend, however, is toward a more collective-friendly civil legal system in most countries.

Law firms in Europe have gained experience in shareholder litigation, and US law firms have been more than willing to export their expertise from US-style class action suits across the pond. In countries where third-party funding of lawsuits is permitted such as in the UK, litigation funding firms have proliferated. Additionally, companies doing business in the US, and particularly those whose shares trade on US exchanges, are exposed to the dangers of the US class-action-prone legal system. The number of lawsuits filed against European companies, and their directors and officers, in US courts has leaped recently, reconfirming the risks posed by the plaintiff-friendly US legal system. The implicit foreign company protection assumed for so many years in the US has long passed.

As European directors and officers are placed increasingly under the microscope of transparency, and as litigation remedies become more readily available for shareholders, the number of suits against corporate boards and managers is expected to mushroom. New corporate governance rules are more clearly defining responsibilities, providing more obstacles for directors and officers to trip over, revealing a maze of potential liabilities. Tougher regulations brought about by the backlash against the causes of the economic crisis may result in increased claims. D&O liability insurance has become one of the fastest growing insurance products in Europe, as it is increasingly viewed as essential by European public companies and their directors.

The state of corporate governance is evolving in Europe, and the degree of liability faced by directors and officers varies widely between countries. This report serves as a Baedeker of sorts for a risk management trip through Europe.