Thread by @bopinion

Elon Musk was on to something when he complained that the cost of insurance to protect company directors from shareholder litigation has gotten out of control trib.al/kyVUqIQ

The impulsive Tesla boss may be an unlikely spokesperson for the unfairness of these spiraling fees, but they reveal something about this age of corporate misadventure and trigger-happy lawyers.

It’s bad for shareholders, companies and insurers alike trib.al/kyVUqIQ

When executives get sued, the payouts can be steep:

💰Volkswagen had a $320 million settlement over former executives’ alleged mishandling of Dieselgate
💰Wells Fargo’s insurers forked out $240 million over the bank’s fake customer accounts scandal trib.al/kyVUqIQ

Securities law is becoming an enormous catchall:

Accounting issues
Cybersecurity breaches
Data privacy lapses
Environmental calamities
Sexual impropriety

Social media is another minefield: Musk and Tesla’s board was sued earlier this year over his tweets
trib.al/kyVUqIQ

🇬🇧 In the U.K., company D&O rates jumped an eye-watering 130% in 2020 to levels last seen in the wake of Enron’s collapse.

Rates for FTSE-100 companies have almost quadrupled, it said trib.al/kyVUqIQ

Emerging sectors are having particular difficulties finding adequate coverage because insurers have less visibility on what the potential risks might be for…

➡️Cannabis
➡️Cryptocurrency
➡️Blank-check companies
trib.al/kyVUqIQ

Several SPAC mergers involving electric-vehicle companies have already sparked shareholder lawsuits, including at:

➡️Canoo
➡️Nikola
➡️Lordstown Motors

The SEC has also raised doubts about whether the financial projections of SPACs enjoy legal protection trib.al/kyVUqIQ

Insurers are also getting pickier about who they cover and by how much.

Large companies are able to swallow these costs, albeit reluctantly. However, smaller businesses might have no choice but to accept lower coverage limits or a higher deductible trib.al/kyVUqIQ

Some firms may even decide that becoming a public company just isn’t worth the hassle.

Few boards are willing to go without D&O coverage altogether, something Warren Buffett famously insisted on so as to make directors more wary of “messing up” trib.al/kyVUqIQ

Fortunately, some firms have found innovative workarounds to this insurance headache.

Musk’s surprising response was to offer to insure fellow board members himself before backtracking after proxy advisors objected due to potential conflicts of interest trib.al/kyVUqIQ

A better option might be to create what’s called a captive insurer, an in-house insurance subsidiary that underwrites the company’s D&O risk.

Canadian cannabis company Hexo set aside $24 million to do so. It might save up to $12 million in yearly premiums trib.al/kyVUqIQ

Rocketing premiums are also the result of the sheer volume of the securities litigation companies are getting hit with.

Wider availability of litigation finance has helped fuel more lawsuits and some top corporate lawyers now charge over $1,800 per hour trib.al/kyVUqIQ

There will always be tension between shareholders’ important right to seek legal redress and ensuring companies don't spend all their time in court.

Soaring D&O premiums indicate that balance is increasingly out of kilter. Only the lawyers can be content trib.al/kyVUqIQ