Your D&O Insurance Policy Post-Halliburton

by K&L Gates LLP

This article was first published in Law360 on July 25, 2014.

In its recent, highly anticipated decision in Halliburton Co. v. Erica P. John Fund,[1] the U.S. Supreme Court declined an invitation to overturn the so-called “fraud on the market” presumption applicable to securities class action certification.[2] Had the court accepted that invitation, Halliburton might well have been a game changer that markedly altered the securities class action landscape — and the directors and officers liability insurance market.

Without the presumption, it would be far more difficult for Rule 10b-5 plaintiffs to obtain class certification — and therefore much more difficult for the plaintiffs bar to use the specter of massive class damages to extract from companies and their D&O insurers the types of enormous settlements that are a current feature and reality of securities class action litigation.[3]

Nevertheless, while clearly not the game changer that publicly traded companies and their D&O insurance carriers may have hoped for, Halliburton offers securities class action defendants a significant new arrow in their litigation quiver: companies may now attempt to rebut the presumption at the class certification stage by demonstrating that their alleged misrepresentations had no impact on stock price, rather than wait for a trial on the merits. In addition to having the clear potential to change the way that securities claims are litigated, companies are well-advised to consider the potential insurance implications. Below is a brief overview of the decision and a discussion of the potential insurance implications.

The Halliburton Decision

By way of brief background, in Halliburton a group of investors brought a putative class action against Halliburton and one of its executives asserting misrepresentations in violation of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.[4] For years, the parties have been fighting as to whether a class should be certified.

On remand from the Supreme Court’s initial decision on class certification, which held that plaintiffs need not prove loss causation at the class certification stage in order to invoke the fraud on the market presumption, Halliburton argued that class certification was inappropriate because the evidence it had earlier introduced to disprove loss causation also showed that none of its alleged misrepresentations had actually affected its stock price and, therefore, it had rebutted the presumption. The district court rejected this argument, applied the presumption and certified the class.

The Fifth Circuit affirmed. While acknowledging that “‘Halliburton’s price impact evidence could be used at the trial on the merits to refute the presumption of reliance,” the Fifth Circuit held that Halliburton “could not use such evidence for that purpose at the class certification stage.”[5]

In an opinion authored by Chief Justice John Roberts, and joined by Justices Anthony Kennedy, Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan, the court declined to overturn the fraud-on-the-market presumption, which was first adopted by the court over 25 years ago in Basic Inc. v. Levinson,[6] noting that “[b]efore overturning a long-settled precedent” the court would “require ‘special justification,’ not just an argument that the precedent was wrongly decided.”[7] The court ultimately found that special justification lacking.

Nevertheless, while declining to overturn the Basic presumption, the court held that securities class action defendants “must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock.”[8] Indeed, the court emphasized the “bizarre results” that may ensue if defendant companies were not afforded the opportunity to demonstrate that alleged misstatements had no ”price impact” on share value.

The court noted in this regard that plaintiffs and defendants both submit price impact evidence prior to class certification for purposes of demonstrating (and rebutting) general market efficiency and that this evidence may show “an efficient market, on which the alleged misrepresentation had no price impact.”[9] The court found that, if certification were granted in that circumstance, “[s]uch a result is inconsistent with Basic’s own logic.”[10] The court clarified that “[w]hile Basic allows plaintiffs to establish [price impact] indirectly, it does not require courts to ignore a defendant’s direct, more salient evidence showing that the alleged misrepresentation did not actually affect the stock’s market price and, consequently, that the Basic presumption does not apply.”[11] Because the courts below denied Halliburton the opportunity to defeat the presumption, the court vacated the judgment and remanded the case.

Impact and Insurance Takeaways

From a defense perspective, Halliburton is not the game changer that it might have been. However, although the full impact of the decision will be realized over time, the decision clearly has the potential to change the way that Rule 10b-5 securities claims are litigated, and may be of significant benefit to companies and their D&O insurers.

For starters, although it remains to be seen whether the case will result in fewer cases filed, or a significant number of cases recast as omission cases (as opposed to affirmative misrepresentation cases),[12] it certainly will result in the denial of class certifications in cases in which certification previously would have been granted.[13] To the extent certification is avoided, plaintiffs lawyers are obviously curtailed in their ability to extract enormous settlements based on the specter of massive classwide damages — which clearly is of benefit to companies and their D&O insurers.

From an insurance perspective, Halliburton also, not surprisingly, does not have the type of wide-ranging impact on the D&O insurance market that it may have had if the court had overturned the Basic presumption.[14] Nevertheless, companies are well-advised to keep in mind that the decision is likely to increase -— and may significantly increase -— defense costs at and prior to the class certification stage in view of the need for expert witness testimony and discovery regarding price impact, and anticipated discovery battles surrounding the types of, and quantum of, price impact evidence that companies may rely upon to rebut the Basic “fraud on the market” presumption. One insurer has noted that “[p]resenting this evidence, in the form of event studies prepared by expert economists, may lead to significant costs for plaintiffs and defendants early in the litigation process.”[15]

In this regard, companies may wish to carefully consider their D&O program and confirm that their policies would respond to cover expert witnesses and “event study” expenses. Importantly, D&O policies can and do differ substantially from carrier to carrier — even from policy to policy underwritten by the same carrier.

Coverage for expert witness fees and costs generally would be found within the definition of “defense costs” — a definition that typically is made part of the broader definition of a covered “loss” under D&O insurance contracts, which generally cover “loss” on account of any “claim” for a “wrongful act.” Policyholders will typically argue that the definition of “defense costs” includes expert witness fees and “event study” expenses. On the other hand, some insurers facing increased defense costs after Halliburton, may contend that policies that do not expressly reference “experts’ fees” do not provide coverage for such fees and expenses.

Corporate policyholders should also be aware that, anticipating the Halliburton decision, at least one insurer has issued a new endorsement, which provides, for no additional premium, first-dollar ($0 retention) coverage for class certification event study expenses. In particular, the specimen endorsement adds “class certification event study expenses” to the policy definition of “loss” and states that “no retention shall apply to loss incurred as class certification event study expenses.”[16] “Class certification event study expenses” is defined to include the fees and expenses of an expert witness to conduct an admissible price impact study. Specifically, class certification event study expenses is defined to include the following:

The reasonable and necessary fees, costs and expenses of an expert witness consented to by the Insurer, which consent shall not be unreasonably withheld, incurred by an Insured to conduct an admissible event study regarding any issues of fact relevant to the court’s decision as to whether to grant class certification in a Securities Claim.[17]

The insurer has stated that it created the endorsement to provide funds to obtain the event studies “early in the litigation process, potentially to head off class certification.”[18]

The assistance of knowledgeable insurance coverage counsel at D&O insurance placement and renewal can help to make sure that companies understand the changing litigation landscape and have policy language that adequately responds to that changing landscape.


[1] 2014 WL 2807181, --- U.S. ---- (U.S. June 23, 2014).

[2] Under the “fraud on the market” presumption, Rule 10b-5 plaintiffs seeking class certification under Federal Rule of Civil Procedure 23 need not demonstrate that each individual plaintiff relied upon alleged misrepresentations. Instead, plaintiffs are entitled to a rebuttable presumption that, in well-developed markets, a company’s share price reflects all publicly available information about the company, including any material misrepresentations, and that the plaintiffs relied upon the share price and, therefore, presumably also relied upon the misrepresentations in deciding to buy or sell a company’s stock. As a result, whenever an investor buys or sells stock at the market price, his “reliance on any public material misrepresentations... may be presumed for purposes of a Rule 10b–5 action.” Halliburton 2014 WL 2807181, at *7 (quoting Basic Inc. v. Levinson, 485 U.S. 224, 247 (1988)).

[3] As the Supreme Court in Basic Inc. v. Levinson noted, “[r]equiring proof of individualized reliance from each member of the proposed plaintiff class effectively would have prevented respondents from proceeding with a class action, since individual issues then would have overwhelmed the common ones.” 485 U.S. 224, 242 (1988).

[4] Halliburton 2014 WL 2807181, at *4.

[5] Id. at *5 (quoting Erica P. John Fund Inc. v. Halliburton Co., 718 F.3d 423 (2013)).

[6] 485 U.S. 224 (1988).

[7] Halliburton 2014 WL 2807181, at *6.

[8] Id. at *17.

[9] Id. at *15.

[10]Id. at *16.

[11] Id.

[12] The Supreme Court has held that in circumstances “involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision.” Affiliated Ute Citizens of Utah v. U. S., 406 U.S. 128, 153-54 (1972). Plaintiffs also may recast claims as claims alleging violations of Sections 11 and 12 of the Securities Exchange Act of 1933.

[13] On the other hand, it is likely that the majority of meritorious 10b-5 claims involving securities traded in efficient markets will continue to be certified. In a concurring opinion, Justice Ginsburg, joined by Justices Breyer and Sotomayor, stated that “[t]he court's judgment ... should impose no heavy toll on securities fraud plaintiffs with tenable claims.” Halliburton 2014 WL 2807181, at *18.

[14] For an excellent discussion concerning how Halliburton may have impacted the D&O insurance market, see Kevin LaCroix, Top Ten D&O Stories of 2013 (Jan. 7, 2014), / (“Among the many consequences that would result if the Basic presumption were set aside, it seems likely that the way many public companies purchase D&O insurance would change. As Joe Monteleone noted on his D&O E&O Monitor blog, the end result could be that ‘there will be less of a need to buy large towers of D&O insurance, a likely reduction in rates and perhaps an overall shrinking of the D&O marketplace with fewer players and less revenue in both the insurer and brokerage communities.’ Of course, if securities litigation were to mutate into something smaller but more complex, the impact on D&O purchasing patterns and rates could take a different turn.”).

[15]Introducing the Event Study Endorsement

[16] AIG Class Certification Event Study Expenses endorsement, Specimen Form 117960 (6/14).

[17] Id.

[18] See AIG D&O Endorsement Responds to Change from Supreme Court ‘Fraud on the Market’ Decision, Business Wire (June 22, 2014).


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© K&L Gates LLP | Attorney Advertising

Written by:

K&L Gates LLP

K&L Gates LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.