The report, as well as a Congressional hearing, also delved into fraudulent practices, such as encouraging falsified applications for federal tuition assistance.

It's probably too late for D&O insurance underwriters of for-profit schools, Mr. Savett said, noting that they are already on the hook to defend securities lawsuits filed against their insureds alleging that fraudulent practices artificially buoyed stock prices which tanked when the GAO report came to light, Mr. Savett observed.

Going forward, however, he said "it's important to note that as soon as the first domino falls, there go the rest of them," adding that D&O underwriters should pay careful attention to "those industries that either have heightened regulatory scrutiny" or those where individual firms have received subpoenas.

He said that a similar phenomenon took place in 2009 in another highly regulated sector–financial services–when a series of exchange-traded funds were sued, with investors alleging that the true risks of their investments were not adequately disclosed at a time when the Securities and Exchange Commission was warning of potentially large losses in volatile markets.

"Now that the financial crisis is fading ever so slightly into the background, Congress can turn its attention to other things," Mr. Savett warned. "There are other sectors out there. If you just read the Congressional reports that come out, you'll see this is what Congress is targeting–and when Congress targets, then state and federal regulators target. And when state and federal regulators target, then the private plaintiffs' bar targets," he said.

"It doesn't always happen nice and neat that way, but you substantially increase your chances of becoming an eventual securities litigation target if you fall into one of two buckets–being a regulatory or an attorney general target," he said.

Mr. Savett made his remarks during a webinar held in conjunction with Advisen's release of its third-quarter report on securities litigation trends.

During the webinar, sponsored by ACE, moderator David Bradford, executive director of Advisen, and several D&O insurance experts discussed past contagion events impacting the D&O insurers:

• IPO laddering cases in 2001 (alleging wrongdoing in the process used by lead securities underwriters to allocate shares of initial public offerings).
• Cases emerging from options backdating investigations in 2007.
• Cases emerging from the subprime/ credit crisis in 2007 and 2008.
• Cases filed in the wake of the Deepwater Horizon oil rig explosion earlier this year.

John Molka, senior industry analyst and editor for Advisen, who authored the third-quarter analysis, reported that credit crisis suits have run their course. He added that even though there was no major event like the BP crisis, securities suits were up in the quarter, compared to past years and quarters.

Advisen counted 284 suits altogether in the third quarter of 2010, compared to 278 in the BP-impacted second quarter.

Annualizing the third-quarter 2010 figure, Mr. Molka produced a full-year estimate of 1,136 case, which he noted would eclipse an actual case count of 1,105 for 2009 and a total of 928 for 2008–the two years heavily impacted by credit crisis suits and Madoff-related suits.

"Many of the plaintiffs' attorneys have moved on to other suits," Mr. Molka said, noting that while financial institutions were still the top sector among types of defendants–garnering 22 percent of the third-quarter total–new lawsuits were more evenly dispersed among information technology (19 percent), health care (12 percent) and other sectors.

Mr. Molka also noted the continuation of a trend that has plaintiffs' lawyers moving beyond federal securities class actions to file other types of suits, including cases that allege breaches of fiduciary duty brought in state courts.

As in past reports, the latest Advisen analysis includes breach of fiduciary duty suits, derivative actions (brought by shareholders on behalf of the company, naming directors and officers as defendants), and securities fraud (regulatory) actions (such as lawsuits or proceedings by the U.S. SEC suits) along with federal securities class actions in the overall 284-suit count.

Now representing the largest portion of the total–at 34 percent in the third quarter–the breach of fiduciary duty suits have exploded from only 8 percent of the total in 2004 and 24 percent in 2009, according to Advisen.

Mr. Molka explained that resurgent merger-and-acquisition activity has fueled the jump. "Some shareholders might feel cheated on these deals because their stock price is so low compared to a couple of years ago. That may have added fuel to the fire," he said, noting that the fiduciary duty suits were the primary driver of this quarter's overall rise in securities suits.

Illustrating the extent of the spike in the merger-objection and other breach of fiduciary duty suits in recent years, Mr. Molka reported that there were 97 such suits in the third quarter and 112 such suits in the entire year of 2007.

TAKEAWAYS FOR INSURERS

Kevin LaCroix, a broker with OakBridge Insurance Services in Beachwood, Ohio, highlighted the changing mix of suit types–once dominated by class actions–as an important takeaway for D&O insurers. "There's a tendency to focus on securities class actions [because] that's where the greatest severities come from. But if you were to look just at the securities class action lawsuits, you would come away thinking [that] we're in a lower litigation arena," said Mr. LaCroix, who authors the D&O Diary blog.

"That's clearly not true, [and] prudent underwriters should be concerned," he said.

Advisen reported that securities class actions, which comprised one-third of all securities suits four years ago, made up 19 percent of the total through the first three quarters of 2010.

"There's heightened activity at an overall level, [which] is particularly important for carriers concentrated in primary layers"–those that are impacted by claims frequency, Mr. LaCroix said. "Frequency is severity in this arena. Primary carriers are going to see their claims-to-bound account ratios go up," he said. "No matter how you slice it, that's an unfortunate and unwelcome phenomenon," he said.

Mr. Savett viewed the slicing distinctions–the case types of breach of fidcuciary duty vs. class action vs. derivative suit–as a matter of semantics, but he also highlighted the jump in overall litigation activity as an important finding.

"As a former plaintiff-side litigator, I view all of what we're talking about as securities class actions–cases brought under federal or state securities laws on behalf of a class," he said. "The merger-objection cases…..are traditional securities class actions to my way of thinking."

Mr. Savett agreed that these merger-related cases "have come back with a vengeance over the last 12-18 months. Part of that is the capital markets unfreezing and there being increased deal volume," he said.

Noting that there was a merger-objection lawsuit filed after almost every merger announcement this year, he suggested that another reason revolved around the struggles that "older-line plaintiffs-side securities firms" have encountered in surpassing the hurdles of the Private Securities Litigation Reform Act–even 15 years after its passage in 1995 (attempting to curb frivolous stock-drop cases).

Because these firms don't have the client bases to get leadership positions (representing lead plaintiffs as spelled out in the Act), they were locked out of major cases like the WorldComs and Enrons earlier in the decade. "So they're carving off a niche here or a niche there, and some of them have really aggressively started going into the deal- or merger-objection cases."

"You also have a lot of newer entrants going into that field," Mr. Savett reported. "It's tough to do a Google search for the [phrase] class action or securities class action without seeing an ad pop up that asks are you objecting to whatever the latest announced merger is."

"There are a lot of firms trolling for plaintiffs, including ones you've never heard of before," he said. "The barrier to entry is fairly low. You need a Google AdWord account, an Internet connection and an answering service, and that's about it in order to be a plaintiffs' securities lawyer," Mr. Savett said.

Later in the Advisen webinar, Mr. Savett presented findings related to one of the past contagions–the stock-options backdating scandal–the first contagion to give rise to more derivative lawsuits and breach of fiduciary duty suits than class actions.

Steve Carabases, vice president of claims for ACE, explained why this occurred in the backdating cases and discussed the lasting effect that has kept these cases other than class actions at high levels.

In the backdating situation, Mr. Carabases said, there were no significant stock drops when disclosures were made–the traditional driver of class action filings. In addition, a series of Supreme Court rulings made it more difficult to pursue securities class actions, post-PSLRA, in the federal courts.

With plaintiffs firms headed by William Lerach and Mel Weiss in turmoil at the time (both ultimately pleaded guilty to charges that they paid secret kickbacks to individuals who agreed to act as plaintiffs in securities class actions), "new firms trying to find their way in the plaintiff-bar jungle" saw derivative actions as a way to pursue cases in less intimidating forums of state courts.

In addition, he said that internal investigations of defendants alleged to be involved in backdating activities gave roadmaps to these firms to pursue fiduciary breach claims. They helped support arguments that boards were asleep or permitted certain conduct, he noted.

"Flash forward to M&A activity, and you start wondering if executives within an organization are permitting a going-private deal or a merger between two public companies to take place because they are protecting their own interests–protecting their jobs, holding on to a golden parachute, involved in employee retention deals that aren't disclosed," he said. "Breach of fiduciary duty becomes a very powerful weapon for plaintiffs bar."

"From our perspective, it appears that any deals taking companies private or mergers are going to lead to litigation. That is a reflex at this point," Mr. Carabases said. "It's here to stay–and it's expensive," he said, noting that these cases quickly erode defense costs in primary layers.

"The costs associated with them are more difficult to read tea leaves on, because you really have to focus on what sort of gadflies or activists you're dealing with–that either are trying to make a deal happen or prevent a deal from happening. This often leads to requests for different counsel for different parts of an organization," adding to the expense, he said.