Securities class action

The securities class action is a procedure codified by the Securities Exchange Act of 1934 and the Securities Act of 1933, profoundly reformed by the Private Securities Litigation Reform Act of 1995, which governs collective investor lawsuits against issuers and their officers. The typical basis is the allegation that the company made false statements, or failed to disclose material information, creating a market price distortion that plaintiffs paid and then lost when the correction came. Directors' personal exposure is direct, making D&O policies the central insurance instrument. Since the mid-2010s, cybersecurity has become fertile ground for class actions: when a data breach occurs and the stock price falls, shareholders allege that executives had publicly represented the company's security as adequate without having the means to back it up, or that they delayed disclosing the incident in accordance with SEC rules, notably the 2023 disclosure rule. The SEC's action against SolarWinds and its CISO in 2023 marked a turning point by personally targeting a chief information security officer for public statements on cyber posture. For D&O insurers, this cyber-securities convergence creates large losses for which historical limits may prove insufficient, and raises interplay questions between D&O and cyber policies.

Following the disclosure of a data breach at a major US health insurer, the stock falls 22% in three days. A class action is filed two weeks later, alleging that the CEO and CFO had stated in the annual report that IT security was a strategic priority, while a classified internal audit had revealed unpatched vulnerabilities for two years. The D&O policy is invoked for defense costs and potential settlement.

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