Financial R&R: Peter Kelly Joins Alliant
By Alliant Specialty
Steve Shappell, Alliant Claims & Legal, Ron Borys and Ryan Farnsworth, Alliant Financial Institutions, welcome Peter Kelly to Alliant. Peter offers his insights as a policy wording attorney on recent legislative developments. The team discusses the new Assembly Bill 398 in Nevada, which outlaws defense costs and the ramifications for businesses, as well as the current trends and challenges for shareholder class action litigation.
Welcome to Financial R&R, a show dedicated to financial insurance and risk management solutions and trends shaping the market today. Here are your hosts, Ron Borys and Ryan Farnsworth.
Ron Borys (00:13):
Well, welcome everyone. I'm Ron Borys. I'm here with Ryan Farnsworth, and this is the Financial R&R. We're really excited to have with us today as a repeat guest, Steve Chappelle, who leads our legal and claims group at Alliant, and probably the newest member of our team, Peter Kelly. Peter joined us about a month or so ago. He's an attorney and he's going to be our new policy wording attorney working in Steve's group and working with our clients and our brokers and everybody on all things policy wording related. So welcome to Alliant officially, Peter. They say you don't officially join Alliant until you're on the Financial R&R. So, this is your official debut and we're looking forward to getting to know you a little bit better.
Steve Shappell (00:51):
Yeah, thanks for the introduction, Ron. Peter, we're thrilled to have you. One of the ways we're going to deliver Peter's product and contribution is through better and more innovative wording. Peter is going to step in here and work alongside me and members of the team and really lead innovation thought leadership, which translates nicely into better and more products for our clients. So, Peter, thrilled to have you. Couldn't be happier for you to join the team and you're already making significant contributions. So, thank you and welcome.
Peter Kelly (01:21):
Thank you, very excited to be here. Glad to join the Alliant team.
Steve Shappell (01:24):
Peter, why don't you take a couple seconds, and just talk about where you come from. I think that gives some additional color on how you will fit in this team.
Peter Kelly (01:31):
Absolutely. I was in private practice working in insurance defense coverage and focused a lot on D&O, but touched on a lot of different financial lines. I was on the dark side, so I'm excited to step over and join you guys. And we've been talking about instead of saying no, we now get to say yes. And I think that's always a good feeling.
Steve Shappell (01:52):
Peter's being kind and throwing me a bone because I like to tease and say that people we bring on from insurance companies and carrier defense firms and coverage firms, we're saving them from the dark side. So, thanks for that bone, Peter. So, I guess one of the things to talk about, Peter, are some of the developments that have really gotten a lot of attention out of Nevada. So why don't you talk a little bit about that and where that's at?
Peter Kelly (02:16):
Yeah. Assembly Bill 398 was passed and then assigned by the governor in Nevada. And a little unusual, the law basically outlaws defense within the limits. So, defense costs would not erode the limits. And obviously there are some major ramifications because essentially a lot of the concerns that our clients have are the defense costs. That's kind of why the policy is there, to help them cover what can be sometimes the most significant part of a claim. And what's odd about it is that Nevada passed this law apparently without doing any sort of googling because several other jurisdictions, not many, but other jurisdictions had passed similar legislation and quickly realized that there are some terrible ramifications and had to scramble to make amendments, to create carve backs or exceptions to the D&O and the E&O and the cyber and professional liability and take that out of the defense within the limits because otherwise they just couldn't get insurances.
One of the first to do it was Quebec and they were the most painful because companies had to look to read domicile outside of Quebec because they were unable to get coverage. New Mexico and Louisiana similarly, and they quickly realized we need to address this. And that's what Nevada now has had to do. They were supposed to take effect in October and then July 20th they had an emergency regulation of the commissioner of insurance basically telling the governor, and the governor signed off on it, that this is a major problem. And somehow whoever wrote the legislation and then they voted on it and then the governor signed it, nobody stopped to maybe think about the possible ramifications. And I think it's an important lesson in reaching out to the stakeholders when you're going to draft legislation like this, figure out how this is actually going to affect the industry. And in this case, it was potentially going to be disastrous, but it looks like at this point they're aware.
Ron Borys (04:05):
So, if I'm understanding this correctly, we know our policies have aggregate limits and typically those limits are inclusive of defense expenses. This proposal to get legislation, would it be essentially giving policy holders unlimited defense expenses? How would that work?
Peter Kelly (04:21):
Yes, they would get a blank check to just run up as much defense costs as they want. And it would not erode the limits of the policy.
Steve Shappell (04:28):
How it would work Ron, a policy of insurance for a public company, and stuck in shareholder class action litigation, some of which spend a hundred million dollars in defense, some entities may become uninsurable if this would take effect. It would be truly disastrous. It's not well thought out. Unfortunately, it's decisions and legislation that focus on really small CGL type insurance for small and middle market entities. It really absolutely unequivocally failed to take any input and comments from anybody as to the ramifications. I've had countless interactions with insurance companies since this, and no one's happy. Insurance companies are correctly puzzled and freaking out about placing policies of insurance with Nevada as an address or Nevada as a state of incorporation. It's very concerning.
Ron Borys (05:20):
So, help me understand this. So, as we know, our programs are built in many cases in layers. So, you have a primary carrier and then a first excess and a second excess. So, let's just say for illustrative purposes, you have three carriers each offering $10 million of capacity, $30 million program, primary 10, 10 x of 10, 10 x of 20 claim comes in, they start paying defense expenses. Is the primary carrier on the hook potentially for all of this? How does it go through the tower? To your point, Steve, I think while on one end the state of Nevada may be thinking that this is a great proposal for policyholders, it's not a great proposal for policyholders if no insurer is willing to insure a business in the state of Nevada. And I would think that's potentially the ramification here.
Steve Shappell (06:07):
Yeah, exactly Ron. And that's why we're looking to solve it, right? Some of the solutions are interesting. The insurance commissioner there responded promptly, and I'll say properly, in working with the governor, but this is legislation and does the governor have authority then to sign legislation and then negate its effect? How do we do this? And the additional challenge is Nevada legislators are not back in session until something like 2025. It's a very odd, unique timing. So, stay tuned. Peter and I have got our finger on the pulse of this thing, and we're continuing to figure out can the governor and the insurance commissioner realistically solve this kind of unintended consequence here.
Peter Kelly (06:47):
Yeah. And I think hopefully the emergency regulation is good until November. So, it's definitely a placeholder and they're going to try to figure out what they're going to do with this. I know in Louisiana that when they did amendments, they allowed for a waiver as long as you had conspicuous notice in the policy that you were waiving, or specific call outs, or I think they also said that the insurance commissioner is allowed to make categories that it won't apply to. So those are some of the options that Nevada has. The question is what is the direction; are they going to take it?
Ryan Farnsworth (07:18):
Fascinating development. You can't make this stuff up sometimes, but I guess that's why we have Steve and Peter on our team to help us make sense of these issues. And ultimately, it's what the policies say that determines how the insurance is responsive. And that's why your part of our team is so critical for us going forward, because truly the words do matter, right? These types of regulations do matter, and we want to ensure that our clients have that contract certainty within their policy so they know what they're buying, they know where coverage can be expected to respond. Peter already followed up with me earlier today with a couple of my clients and saying: Hey, let me take a crack at these policies that are coming up for renewal. Let's start digging our heels in and understanding where we need to improve, how we need to be better based on cases that we're seeing and claims that we're experiencing.
It's just yet another way that Alliant is trying to help our clients find that more rewarding way to manage risk. And that's through insurance policies and effective policy language. So thrilled to have you, Peter, look forward to hearing more from you in coming podcasts and working together with you. And hard to believe it or not, we just entered the month of August, and by the time some people hear this it'll be getting towards the end of summer, and we're start thinking about making Thanksgiving and Christmas plans and holiday plans as we get towards the end of the year. And there's no more favorite topic perhaps than Steve Chappelle tracking securities class action claims as we go throughout the course of the year and the lawsuit. So, I would love, Steve, while you're with us, to hear some of your takeaways now that we're more than halfway done through the year. What are we seeing from a securities class action activity perspective and what can we expect perhaps between now and the end of the year? What are the hotspots?
Steve Shappell (09:02):
Yeah, so the good news, right? One of the things I find very favorable for this year is the severity for cases settled. The first half of this year is down, right? And I'll say it's down dramatically, to a median of 21 million versus last year a median of something like 39 million. So that's dramatic reduction. Last year, total settlement of shareholder class actions exceeded $4 billion. For first half of the year it's something like $735, $740 million. So, that's really good news, the severity is down, the frequency: one of the things that's interesting is frequency has ticked up a little bit this year. It's not alarming. It's not like some of the years in the past where we have 200-300 shareholder class action settlements. Right now, we're on a pace for a 170, 175 shoulder class action suits, which will be a substantial tick up from last year.
Again, that with the severity being down, it's manageable, right? And then the other comment I'd make for first half of the year is, who are their targets? Technology is always a favorite of the plaintiff's bar. They love technology and they typically love healthcare and pharmaceutical, but it's interesting. So healthcare, health technology, pharmaceutical and financial services have kind of flip flopped so far this year where almost a quarter of shareholder class action suits involved public companies in the financial sector versus healthcare, which has ticked down from almost 30% last year to 13% this year. It's an interesting change in frequency against particular sectors. And while there is a number of crypto claims this year, which will fall into that finance category, it is less than and it's trending to be half of what it was last year. So, we're going to keep our eye on that frequency and that sector pretty carefully. And dismissal rate remains pretty high. The dismissal rate is hovering around 60% resolved cases in the last two years, are 60% dismissal and 40% settlement rate. So, it's trending in a positive way and I think the D&O marketplace is reflecting kind of positive trends in the frequency and severity.
Ron Borys (11:13):
That's great. Like I said, this is something you and your team keep a very close finger on the pulse of. I know firsthand how valuable your perspective and insight and knowledge of this is to our clients. Securities class action, litigation filings, frequency of filings and severity of loss historically have been a barometer for the D&O market. You know, something that we will continue to keep our listeners very up to date with and current on, because it's super important. So, Peter, I have one last question for you before we wrap. I'm a huge college basketball fan. Didn't think you were going to get away with a Financial R&R session without talking about the fact that you've earned your law degree from the University of North Carolina. I happen to be a huge Tar Heels fan, so any inside scoop on what the basketball team's going to look like this year, because you couldn't have failed more miserably from expectations last year being the number one team in the country preseason to not making the big tournament. So, any parting words for our listeners on college basketball and in particular, your expectation for the Tar Heels this year?
Peter Kelly (12:18):
I mean, that was absolutely heartbreaking and unbelievable, and my wife actually went to Duke, so she was happy to rub it in. So yeah, we're a house divided in that respect. But I think they're going to be hungry; they're going to be angry. I think should be a great season. They have lots to motivate them for sure. After last year.
Ron Borys (12:36):
Well just remind your wife that we beat Coach K twice in his last season, first to end his ACC season and second to end his coaching career. So, Coach K, if you're listening to the Financial R&R, we have a lot of respect for you, but we bleed Carolina Blue on the Financial R&R. So, with that, Peter, Steve, thanks for joining Ryan and I, for those of you listening and want to know more about what we're building, what we're doing here at Alliant when it comes to financial institutions, you can visit our website at www.alliant.com. Goes without saying, Peter, we are thrilled to have you as part of our team. I'm really excited to get you working with our clients and hope to have you again on the show at some point in the near future.
Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.
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