In this multi-part series, The InsurTech Lawyer shares some thoughts on the opportunities for insurers in the Metaverse. Originally presented at the Association Internationale de Driot des Assurances (AIDA) conference in Zurich, 6-7 October 2022.
In Part 1 (Introduction), we introduced the idea of insurers playing in the Metaverse. In Part 2 (Legal Proceedings), we explored some of the main crypto asset related litigation and liability issues. But what about securities class actions more generally? We take a closer look today in Part 3.
General comments on securities class actions involving crypto
Side C cover, which responds to securities class actions, can be a major component of D&O insurance programs for listed entities. However, poor claims experience has led to significant price increases and tightened capacity.[1] In addition, the threat of regulatory action from emerging issues such as environmental, social and governance (ESG) disclosures has contributed to a reduction in insurer appetite.[2]
The United States is the most common forum for securities class actions however Australia is the next most likely jurisdiction with the average number of securities class action claims rising by 300% in the period 2008 to 2018.[3] While the uptick in securities class actions claims has been dampened, such relief may only be temporary while plaintiffs consider the impact of statutory amendments. In Australia, changes to continuous disclosure laws that were initially implemented as a temporary measure during the COVID-19 pandemic and which are now permanent require the plaintiff to establish a fault element, that is, the defendant company acted with ‘knowledge, recklessness or negligence’.[4] However, such a requirement already exists in the United States and has not stymied securities class actions.[5] Furthermore, the changes do not affect the general disclosure requirement under ASX listing rules.
However, cryptocurrency related securities class actions are well on their way to moving from second place to first place in terms of the most number of filings in the United States. The graph below shows that the crypto related filings in 2022 H1 alone is well on its way to exceeding the total number of filings in 2021, and is already 70% of total filings in 2018 which was the most litigious year for cryptocurrency related filings.
A variety of defendants are sued in cryptocurrency related securities class actions, meaning that insurance risks are dispersed among a greater number of industry participants. As the pie chart below shows, the most cases have been against coin issuers, followed by crypto exchanges. However, 19% of proceedings are against multiple defendants. An interesting observation is that between 2016 and 2019, only 8% of cases related to crypto exchanges but this has now skyrocketed to 44%.
Increased regulation is likely to support this trend, as with increased regulation comes increased responsibilities, compliance costs, and risks of losses associated with non-compliance. In virtually all jurisdictions where a regulatory regime has been proposed, crypto exchanges are included.
Click here to read Part 4 (Insurance Coverage)
Tim Chan is an insurance & insurtech lawyer at global law firm Norton Rose Fulbright and Founder of The InsurTech Lawyer blog. He regularly advises insurers and startups on emerging legal issues affecting the industry. Follow Tim on Twitter: @timinsydney
[1] Alexandra Cain, ‘What’s ahead for directors’ and officers’ insurance?’ (Web Page, 2021) <https://www2.asx.com.au/blog/listed-magazine/2021/what-is-ahead-for-directors-and-officers-insurance>.
[2] Ibid.
[3] Marsh, ‘Shareholder Class Actions shaping the future of Australia’s D&O insurance landscape’ (August 2018) <https://www.marsh.com/content/dam/marsh/Documents/PDF/en_au/shareholder-class-actions-do-australia-2018.pdf>.
[4] Treasury Laws Amendment (2021 Measures No. 1) Act (Cth).
[5] Treasury Laws Amendment (2021 Measures No. 1) Act (Cth).
