Strategic considerations in settling parallel securities litigation and derivative litigation

Insureds often face the complex task of defending and attempting to resolve securities fraud class actions and parallel corporate derivative litigation. In attempting to settle all cases, economically rational insureds of course should attempt to maximize the use of insurance proceeds and minimize any amounts paid out of pocket by the insured entity or by Insured persons.

Many insureds purchase both Side ABC D&O coverage and Side A only coverage at the top of the tower. Without careful planning, however, insureds can inadvertently fail to maximize their insurance recoveries and/or leave the insured entity and/or insured persons with exposure to pay out of pocket. Given the complexity of this situation, insureds should confer with their trusted advisors, including brokers, to maximize their insurance recoveries and minimize their risks.

Background: In modern times, insureds are often forced to pay substantial sums to settle derivative litigation

Historically, it was rare for defendants to pay substantial sums to settle derivative litigation. Rather, settlements often involved some promise to change a corporate practice and perhaps a payment of a nominal sum or reimbursement of the plaintiff’s attorney’s fees. More recently, there have been numerous derivative lawsuits that have settled for substantial sums, including approximately 11 cases from 2019 to August 2023 that settled for more than $100 million. This trend of cases suggests that derivative lawsuits “are no longer limited to tag-along status, content to be dealt with after settlement of the securities class action^[1].”

Cornerstone recently published a report entitled “Parallel Derivative Action Settlements Update: August 2025^[2],” which summarized “settlement outcomes for parallel derivative lawsuits, in which a shareholder derivative action features the same or similar allegations as a securities class action.” In part, the Cornerstone report concluded that:

• 25% of derivative settlements included a monetary component other than plaintiff attorney fees (“monetary settlements”), while 75% included therapeutic provisions only (“nonmonetary settlements”)
• Among monetary settlements, the median settlement amount for the derivative action was $9.2 million
• The median plaintiff attorney fee award was $2.8 million across monetary settlements and approximately $760,000 across nonmonetary settlements

The Cornerstone report also observed that derivative settlements tended to be higher with respect to cases filed in the Delaware Court of Chancery and when there was a large settlement in the securities litigation and/or related SEC action^[3].

Side A coverage in general

Many companies purchase a combination of Side ABC D&O coverage and Side A-only coverage at the top of the tower.

The Side ABC coverage potentially covers certain claims against the insured entity (Side C), claims against insured persons that are indemnified by the insured entity (Side B), and certain claims against insured persons that the insured entity is not permitted or unable financially to indemnify (Side A).

It is often said that Side A coverage is dedicated to protecting the personal assets of the insured persons. Side A-only coverage may include broader grants of coverage than the Side ABC policy, may eliminate certain exclusions in the Side ABC coverage, and may functionally drop down to a lower position in the tower in the event a claim is covered by the Side A-only policy but not the Side ABC tower.

D&O policies typically incorporate the concept of presumptive indemnification, meaning that if an insured entity is permitted to indemnify an insured person (even if not required to do so), then the insurer can presume that the insured entity will indemnify, meaning that the insured entity would have a Side B claim for coverage (typically subject to a retention). If the insured entity is permitted to indemnify, but declines to do so, then the insurer in certain circumstances will provide coverage to the insured person, but then have the right to pursue the insured entity to recover amounts that the entity was permitted to pay as indemnification (or at least amount the amount of the Side B retention).

Given this concept, Side A coverage is triggered in limited contexts, such as

1. Bankruptcy, e.g., when the insured entity cannot indemnify Insured persons due to lack of financial resources;
2. Derivative lawsuits – state law varies, but in most states, insured entities are permitted to indemnify insured persons for defense costs incurred in derivative lawsuits, but are not permitted to indemnify insured persons for settlements or judgments, which are typically paid to the entity itself; and
3. When state law or corporate by-laws prohibit indemnification due to some disqualifying conduct by the insured person (such as intentional fraud) or when a regulator or prosecutor prohibits indemnification as part of a settlement.

Complex issues arise when attempting to settle

Assume for purposes of this discussion that the insured entity purchased $10 million in Side ABC coverage (subject to a $1 million retention) and $5 million in Side A coverage. For the sake of simplicity, assume that the insured entity incurs exactly $1 million in defense costs and assume that there are potential opportunities to settle a securities lawsuit for $10 million and a derivative lawsuit for $5 million.

In the abstract, a rational company would settle the securities litigation using the $10 million in Side ABC coverage and settle the derivative litigation using the $5 million in Side A coverage. The company would incur no costs (other than the $1 million retention) and the insured persons would incur no costs. The company would fairly recoup all of the coverage for which it paid. But cases do not always proceed in an orderly manner.

• There are generally different law firms representing the plaintiffs in securities litigation and derivative litigation, who may have different views on settlement and the value of their cases.
• The cases often are pending in different jurisdictions. The suits could have materially different case schedules. Mediations and trials could be scheduled at different times. Settlement opportunities could arise at different times.
• Even after there is an agreement in principle to settle a class action securities litigation, it could take months or longer to secure court approval (and it is unknown if certain class members, particularly large institutional shareholders, will opt out and continue to litigate).

Of course, it is impossible to predict the specific settlement value of any case that is not being settled. Based on the trends discussed above, there is a risk that it may take substantial sums to settle any derivative action. As such, insured entities and insured persons must navigate through a complex set of issues.

One might consider it advantageous, in light of these issues, to attempt to settle the securities fraud class action and the derivative suit at the same time. This used to be a fairly common approach back in the day when derivative suits settled cheaply and primarily for fees alone; these days it can be difficult to get the various plaintiff firms in a room at the same time, and the difficulty level of achieving a simultaneous settlement cannot be overestimated (and, what if, during the course of a joint mediation, it looks like one case can be settled, but not the other?).

Insureds should be wary of any suggestion by Side A excess insurers that the derivative litigation should be settled first using the Side A limits that are included in the Side ABC tower; defense counsel for individual defendants also might advocate for this approach given the risks to their clients if the derivative case is not settled with insurance money. Using the simple hypothetical above, however, note that if the insured settles the derivative lawsuit using $5 million of Side A limits in the Side ABC policy, then the entity would only have $5 million left in ABC limits to pay for a securities litigation settlement, meaning that the entity would have to pay $5 million out of its own pocket to settle the securities litigation for $10 million. The Side A-only insurers, however, would pay nothing and save $5 million.

But there are also issues to navigate if the securities litigation settles first. Assume that the insured first has the opportunity to settle the securities litigation for $10 million and has a good-faith belief that they can settle the derivative lawsuit for $5 million or less. But what if they are wrong, and the insured persons in fact face a $10 million exposure in the derivative litigation. Then, by using all of the Side A coverage in the Side ABC policy to settle the securities litigation, then the insured entity may have created a $5 million out-of-pocket personal exposure for the insured persons that the insured entity may be precluded from indemnifying by state law. In other words, the insured persons potentially would face personal exposure if the Side ABC program is used prematurely to settle the securities litigation based on an inaccurately low projection of exposure in the derivative litigation. For this reason, it is common for defense counsel for the individual defendants to push for settlement of the derivative suit in advance of other litigation.

Because of this risk, certain ABC insurers may seek the express consent of Insured persons before agreeing to pay to settle the securities litigation. And certain insured persons may be unwilling to release any claims under the Side ABC coverage if the derivative lawsuit remains pending and their personal exposure remains uncertain.

Many other factors can complicate this situation:

• When are the insureds entitled to indemnification from the entity? In many states, the entity can indemnify for defense costs incurred in a derivative lawsuit, but not settlements. But state law can vary. Are there any other claims that the entity potentially cannot indemnify, such as claims based on alleged disqualifying conduct, such that Side A limits need to be preserved? Is there a risk that a regulator will demand that the insured entity decline to indemnify an insured person?
• Is there a risk of additional litigation or opt-out cases that could increase the exposure of the entity and/or insured persons?
• Does the policy include a priority of payment provision? And what are the specific terms? Many policies generally state that Side A claims must be paid first, but those provisions may apply only if there are contemporaneous demands on the policy and may not expressly resolve what happens when one claim is settled, but there is uncertain potential exposure on a pending claim. In contrast, some policies state that the insurer may pay covered loss as it becomes due without regard to the potential for other future payment obligations.
• Disputes may arise when there are conflicts between current insured persons and ex-insured persons who are perceived to be bad actors, such that the current insured persons try to prevent the ex-insured persons from using much of the insurance limits and try to preserve such limits for the benefit of the current insured persons and insured entity. As discussed above, if a company elects not to indemnify a purported rogue ex-officer or director based on alleged disqualifying conduct (even though it may be permitted to do so), then the insurer may be forced to advance on behalf of that insured person and then seek recovery from the insured (at least up to the Side B retention). And the ex-officer and director could then file a direct claim against the Side A limits in the Side ABC policy, which has the potential to provoke a “race” to deplete limits between the company/current board and the ex-officer and director. In certain cases, insurers may file an interpleader action to resolve such conflicts and/or seek court orders approving any payments that are made.

Conclusion

In sum, the attempt to settle securities and parallel derivative lawsuits raises many complex questions, and insureds and defense counsel ideally should confer with their trusted placement broker and claims advocates to try, without compromising any big-picture defense strategies, to maximize their insurance recoveries and mitigate the risk of out-of-pocket exposures.

Footnotes

1. Kevin LaCroix, “Settlement of Parallel Derivative Actions,” D&O Diary, September 9, 2025. Return to article undo
2. Laarni T. Bulan and Matthew Davis, “Parallel Derivative Action Settlements Update: August 2025,” Cornerstone Research. Return to article undo
3. Kevin LaCroix, “Guest Post: As Derivative Settlements Trend Higher, Side-A Coverage Becomes Crucial,” D&O Diary, August 24, 2023. Return to article undo