Insurers Breathe a (Small) Sigh of Relief as Class Action Lawsuits Drop

Insurers don't like destructive acts of nature such as hurricanes, earthquakes or hailstorms. But they reserve special hatred for lawyers who file class action lawsuits, the bread-and-butter of commercial insurers like Chubb, Travelers and American International Group. And when it comes to lawsuits, the enemy has a human face.

So there must be some smirking going on with news that several surveys, including NERA Economic Consulting, Stanford Securities Class Action Clearinghouse and Cornerstone Research, show that these pesky lawsuits declined as much as 24 percent in the past year, and look to ease even further this year. It doesn't mean insurers, which provide protection for companies in case they lose these lawsuits, will be getting rich, but it does mean that their old adversaries are getting poorer.

Securities fraud suits typically involve claims by investors that companies hid negative information - such as bad earnings or product failure - to artificially inflate stock price. An investor then sues for the loss in share value that follows when the information finally becomes public.

This plaintiff usually seeks to represent the interests of all company investors in the "class" to increase leverage and force more favorable settlements. Often there is a "race to the courthouse" by several law firms trying to get the lead plaintiff status. Lawyers at firms like Milberg Weiss, which put professional "investors" on their payroll to sue at the drop of a hat, were penalized.

As this circus folds its tent, fewer class action suits may lead to a drop in claims for insurers. But there are still ways to sue a company, among them underwriting concerns that center on financial structure, dividend strategy, guidance revisions, executive compensation, investors harmed by securities fraud, negligence, sales of unregistered securities, and misconduct by stock brokers, investment advisers or financial planners.

It's difficult to say how much the reduction in securities litigation will help insurers. Cases that were filed in 2008 and 2009 are still in the system and the ultimate value of those settlements, if any, is unclear. These cases can take years to resolve.

"Less litigation is always preferred to more, obviously," says Robert Hartwig in a statement to BNET Finance. Hartwig is president of the Insurance Information Institute and the man who arguably coined the phrase "judicial hellhole." The fact that credit market volatility has subsided and many stocks have made a strong recovery over the past 10 months removed a great deal of fuel from this fire, he says. In other words, a rising tide floats even a leaky boat.

But the battle is far from over. Major companies which sued for alleged securities fraud in 2009 on behalf of groups of investors include UBS AG, American Express, General Electric Co., Citigroup Inc., Moody's Investors Service Inc., Genzyme Corp., Boeing Co., State Street Corp., Royal Bank of Scotland Plc and Chesapeake Energy Corp.

Then there's always the possibility that another Bernie Madoff will skew the statistics. While most areas of securities litigation were down, Ponzi schemes like his were up. Four times as many of these cases were filed in 2009 as opposed to 2008.