How the Merits Matter: D&O Insurance and Securities Settlements

78 Pages Posted: 17 May 2008 Last revised: 3 Jun 2009

See all articles by Tom Baker

Tom Baker

University of Pennsylvania Carey Law School

Sean J. Griffith

Fordham University School of Law; European Corporate Governance Institute (ECGI)


This Article seeks what may be the holy grail of securities law scholarship - the role of the "merits" in securities class actions - by investigating the relationship between settlements and D&O insurance. Drawing upon in-depth interviews with plaintiffs' and defense lawyers, D&O claims managers, monitoring counsel, brokers, mediators, and testifying experts, we elucidate the key factors influencing settlement and examine the relationship between these factors and notions of merit in civil litigation. We find that, although securities settlements are influenced by some factors that are arguably merit-related, such as the sex appeal of a claim's liability elements, they are also influenced by many that are not, including, most obviously, the amount and structure of D&O insurance. The virtual absence of adjudication results in payment to the plaintiffs' class for every claim surviving the motions stage and, as importantly, a lack of authoritative guidance about merit at settlement. Without such adjudication, the weight of various factual patterns is untested, and the validity of competing damages models remains unknown. Parties structure their settlement by reference to other settlements, but these are opaque and subject to the same set of distortions. In this murky environment, plaintiffs and defendants collude to pressure the D&O insurer to settle on terms that may not reflect the ultimate merits of the claim. More adjudication, we argue, would be the best solution to the problem, but barring that, disclosure of D&O insurance and settlement terms would offer some improvement.

Keywords: Securities, class actions, settlement, insurance, litigation

JEL Classification: G22, G30, K22, K41

Suggested Citation

Baker, Tom and Griffith, Sean J., How the Merits Matter: D&O Insurance and Securities Settlements. University of Pennsylvania Law Review, Vol. 157, pp. 755, 2009, 3rd Annual Conference on Empirical Legal Studies Papers, U of Penn, Inst for Law & Econ Research Paper No. 08-22, Fordham Law Legal Studies Research Paper No. 1101068, Available at SSRN:

Tom Baker (Contact Author)

University of Pennsylvania Carey Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-2185 (Phone)


Sean J. Griffith

Fordham University School of Law ( email )

150 West 62nd Street
New York, NY 10023
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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