Civil litigation rising in the ranks of concerns for D&Os
The Global Directors’ and Officers’ Survey results reveal that ‘civil litigation’ has entered the overall top seven list of concerns for D&Os for the first time (since WTW started tracking the top seven in 2018), placing at number six on the list, with 63% of responders considering it a very or extremely important concern. Whilst it is a new entry and it is a notable development, it was floating just outside the top 7 last year (where 63% also considered it a very or extremely important concern, up from 38% in 2023).
Overall, a company’s litigation risk is influenced by its industry, size, regulatory environment, business practices and relationships with stakeholders. For example, certain sectors – such as, energy, finance and pharmaceutical – are, perhaps, more prone to litigation due to the nature of their products. In addition, larger companies are more susceptible to claims due to their higher public profiles and the large potential reward for claimants.
However, in our view there are a number of factors which have contributed to the litigation risk increasing in recent years on a global scale, potentially explaining why D&Os’ level of concern has also risen. These factors include (but are not limited to):
The phrase 'social inflation' refers to the impact of changes such as higher jury awards, more liberal treatment of claims and new concepts of tort and negligence, which result in an increase in insurance claims, which far exceed economic inflation. Our general view is that there is little risk of a significant surge in social inflation on claims outside the US, because the role of the jury is so significant in delivering the “social” aspect which produces extreme verdicts.
However, many of the drivers underpinning social inflation in the US - the advancement of access to litigation funding, group litigation, involvement of activists in claims, a general anti-corporate sentiment, plus the influence of social media and misinformation etc – all may contribute to a general upward trend in litigation risk across the globe.
Class actions have long been prevalent in the US but, in recent times, they (or other forms of collective action) have spread throughout the globe, driven by a combination of corporate scandals, legislative reform and a developing appetite for litigation outside of traditional markets like the US and Australia. In particular, securities group actions are on the rise (for example, many of the largest cases currently on foot in the UK are securities actions).
The use of collective action mechanisms presents a significant risk to companies and their D&Os, who may be named in the suit or, at least, face intense scrutiny and calls on their time and resources. Large group actions can mean a greater exposure to damages (and, in some jurisdictions, punitive damages) and costs, given the size of the class, in addition to considerable operational disruption and reputational damage from dealing with large-scale litigation.
Litigation funding is common in both consumer and shareholder collective redress actions and, in a number of jurisdictions, it has acted as a catalyst for the use of collective actions. First used in Australia, it has now become available in the US, Canada and is common in the UK and is on the rise in a host of other countries, such as Germany and South Africa. In addition to group actions, it is commonly deployed in antitrust litigation and insolvency/liquidation proceedings and, in fact, it is now becoming much more present in commercial litigation generally (and not just for claimants who might otherwise struggle to fund litigation).
Funded group actions go hand in hand with plaintiff lawyers. A trend in itself and one which we have seen increasingly “exported” from the US, is the proactive plaintiff bar driving both the cost and the volume of liability claims. US plaintiff law firms have looked internationally to identify new liability claims markets and they are well-capitalised, possess the expertise to pursue large scale litigation and collective actions and, importantly, are not conflicted out of actions like their local counterparts. Nonetheless, similar claimant bars are emerging in markets outside of the US. For example, it is to be noted that many of the large securities actions in the UK have been brought by a handful of claimant law firms.
In addition, novel claims are being brought which seek to test the boundaries of liability. Examples are “no injury” lawsuits in the US and distress claims arising out of data loss.
We have noted how most jurisdictions have collective redress mechanisms but some are more favourable to claimants than others. Whilst forum shopping across states is common in the US, other jurisdictions have witnessed a recent spike in forum shopping and extraterritorial liability. For example, forum shopping is positively encouraged in the EU by the Representative Actions Directive (EU) 2020/1828, because Qualified Entities (QEs) from one Member State can apply to be designated on an ad-hoc basis in another Member State. Actions will gravitate towards the most claimant-friendly territories, with competitive situations arising amongst QEs where claims are rooted in more than one jurisdiction.
Forum shopping is already well established in England. For several years, the English appellate courts have shown themselves willing to hear mass environmental claims against parent companies for alleged acts/omissions by their overseas subsidiaries. The conclusion of those cases is that parent companies are likely to owe duties of care to claimants for environmental damage caused by their overseas subsidiaries.
There has been a massive increase in regulatory scrutiny and enforcement activity since the global financial crisis in many jurisdictions. In addition, the regulatory environment is increasingly politicised - this has a range of important business and reputational consequences but it also has the effect of complicating, and sometimes worsening, any related civil claims which increasingly run in parallel with regulatory actions. In the UK, for example, it is common for civil claims to follow regulatory findings – the current motor finance discretionary commission issue, for example, has resulted in regulatory scrutiny, a potential regulatory redress scheme, civil claims and a rumoured group action. In addition, regulatory focus on individual accountability has thrown a spotlight on D&Os and their role in high profile scandals and company collapses.
Many jurisdictions report an increase in consumer activism. Product liability and data driven claims are particularly of interest to activists, and we anticipate that climate and environmental claims will increasingly be driven by activism.
This activism is driven by a number of factors. For example:
Together, these factors enable consumers to be better informed of their rights and contribute to a rise in seeking to hold businesses to account.
This awareness goes hand in hand with a general anti-corporate distrust in society and a desire to “blame” someone when something goes wrong. Studies[1] show that younger generations, in particular, view corporations with scepticism, distrust their motives, even where genuine, and have a greater need to right social wrongs. This sits alongside a general increased social pessimism and income inequality, fuelled by political division, social media and “fake news”. In addition, since the financial crisis, in particular, there is a public sentiment that D&Os are “fat cats” – media headlines about executive pay and the disparity between that of their workers has fuelled the belief that CEOs and boards are overcompensated and acting in their own interests.
This is not intended to be an exhaustive list of reasons why civil litigation presents a clear risk to companies and their D&Os but seeks to show that there are a melting pot of factors which all contribute to make it so, going some way to explain why D&Os now consider it to be within their top seven concerns. This melting pot is hard to mitigate or plan for, though the implementation of a good corporate culture (led from the top), adequate systems and controls and risk management strategies, along with clear communication with stakeholders and the public goes some way to reducing the risk of claims.
