The Role of D&O Insurance in Securities Fraud Class Action Settlements

Abstract

Due to previous data unavailability, it is unclear how important directors’ and officers’ (D&O) insurance is in securities fraud class action settlements. Using a unique dataset of U.S. D&O policies, we find that D&O coverage is a less significant determinant of settlement amounts than estimated damages and proxies for case merits. D&O limits are related to settlements in only the weakest cases (those without accounting allegations or institutional lead plaintiffs) where proxies for case merits play a minimal role. Our findings suggest that most securities fraud class action settlements are meritorious and accounting-related cases are a reasonable proxy for fraud.

Keywords: Securities Litigation, Directors’ and Officers’ (D&O) Insurance, Settlements, Fraud

JEL Classification: K22, M41