Increased Risk of Litigation in Europe

For those of you doing business in Europe, this post from Stuart Collins may be of interest.

Lloyds warns on litigation risks

Posted by Stuart Collins Business Insurance Europe

LONDON—Lloyd's of London has warned that class actions, forum shopping and third-party funding of litigation are on the increase in Europe and the United States.

In its latest 360 Risk Project report, "Litigation and Business: Transatlantic Trends," Lloyd's said that these three trends are gaining momentum.

The report claimed that the risk to business of mass litigation is likely to increase in Europe, as the opportunities for class actions grow. Lloyd's noted that Portugal, the Netherlands, Spain and Sweden have class action mechanisms in place, while Germany has restricted class action litigation.

"Class actions are common and controversial in the United States, and are looming on the European horizon as well," the report said.

The report also warned that forum shopping can arise in the European Union, despite efforts to harmonize rules in the region. And Lloyd's noted that the risk for European companies of being sued in the United States is high; however; there are benefits to resolving large claims in the United States in order to pre-empt actions elsewhere.

The growth in third-party funding of litigation is likely to accelerate in the current economic climate, according to Lloyd's, as investors see third-party litigation funding as an alternative to investing in financial markets.

Focus on Directors’ and Officers’ Exposures in UK

The upheaval over the last few weeks in the financial markets has again placed Directors & Officers ("D&O") insurance in the spotlight. With the move towards a climate of increased regulation globally, exposures for directors, and the companies by which they are employed, has increased greatly. In the UK such additional exposures have followed the enactment of legislation such as the Environmental Protection Act 1990, the Financial Services and Markets Act 2000, the Companies (Audit, Investigation and Community Enterprise) Act 2004, the Companies Act 2006 and more recently the Corporate Manslaughter, Corporate Homicide Act 2007.

D&O cover, of course, protects a director or officer (and the company) against those potentially significant liabilities which may arise from their actions. Such cover is also important to attract high caliber personnel who may otherwise be wary of taking such positions, particularly for large multi-national companies exposed to multi-jurisdictional regulation and legal systems.

Following on from 1 October 2007 when the majority of the director duties as codified in the 2006 Companies Act came into force, on 1st October 2008 certain additional duties of directors will take effect including: a duty to avoid conflicts of interest be it direct or indirect (although there are provisions for such conflicts to be authorized); a duty not to accept benefits from third parties; and a duty to declare an interest (direct or indirect) in proposed transactions or arrangements.

In addition to the duties on conflicts of interest, the other duties for directors which have been codified by the 2006 Companies Act include:

• to act in a way which they consider in good faith is likely to promote the success of the company for the benefit of members as a whole (directors have to take into account six separate factors including interests of the company's employees and the impact of the company's operations on the community and the environment);
  
• to act in accordance with the constitution of the company and to exercise powers for purposes conferred by the company's memorandum and articles of association; to exercise independent judgment; and
  
• to exercise reasonable skill, care and diligence.
  

It is therefore now more important than ever to consider what D&O cover is in place in terms of cover and financial limits. The other type of issues which may arise include the extent of claims control given to the director/company/insurer; the scope of cover available for multi-jurisdictional claims (e.g. cross border extradition actions); and whether defense costs are funded in advance and not at the end of civil or criminal proceedings.

A Simple Check Mark Can Save Millions of Dollars

So the other day I am reading an article that a leading insurance broker and they are announcing the formation of a separate retail agency to focus on smaller and emerging growth companies. This segment pays approximately $80 billion in insurance premiums annually. However, the part of the article which really caught my attention was the statement by the executive of this new operation was that they will not be servicing 'global companies'.

I assume I know what he meant by his statement, but I wonder why say it? My experience is that growth companies are 'global' companies. Not in the way that Coca cola or UPS or global companies, but do the owners, or any of their employees travel overseas? Do they have any sales outside of the U.S.? Most companies that provide coverage for the U.S. firms with international exposures make available simple questions to ask Clients. If the Client answers YES to any of them, then the agent has identified a 'global' exposure. Examples of these checklists can be found at ACE Advantage and AIG World Source.

In the last post, I point out that 46% of all U.S. businesses currently have sales in jurisdictions other than the U.S. With this fact always on my mind, I am astounded when I encounter professional insurance agents during my travels who appear oblivious to their Clients operations, knowing how easily they can find insurance products to protect their Clients assets – financial and human.

There is enough uncertainty in today's economy. Take a moment to use a simple checklist, create your own if necessary, and save businesses millions of dollars.