Elon Musk was on to something when he complained that the cost of insurance to protect company directors and officers from shareholder litigation has become out of control. The impulsive Tesla boss may be an unlikely spokesperson for the unfairness of these spiralling fees, but they reveal something about this age of corporate misadventure and trigger-happy lawyers. It is bad for shareholders, companies and insurers alike.
Securities law is becoming an enormous catchall. It is no longer just accounting issues that bosses have to worry about. It is cybersecurity breaches, data privacy lapses, environmental calamities and sexual impropriety too. Social media is another potential minefield: Musk and Tesla’s board was sued earlier this year over his tweets.
Several special purpose acquisition company mergers involving electric-vehicle companies have already sparked shareholder lawsuits, including at Canoo, Nikola and Lordstown Motors. The US Securities and Exchange Commission has emboldened disgruntled shareholders by raising doubts about whether the very optimistic financial projections Spac executives tout enjoy legal protection.
Large companies are generally able to swallow these costs, albeit reluctantly. However, smaller businesses might have no choice but to accept lower coverage limits or a higher deductible, potentially hindering their ability to attract talented directors and stifling the good kind of corporate risk-taking. Some firms may even decide that becoming a public company just is not worth the hassle.
A better option might be to create a captive insurer, an in-house insurance subsidiary that underwrites the company’s D&O risk. Canadian cannabis company Hexo set aside C$30m to do so in a move it estimates will save up to C$15m in yearly premiums. Rocketing D&O premiums are also the result of the sheer volume and expense of the securities litigation companies are getting hit with nowadays, some of which is meritless.
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