The annual shareholder proposal season often serves as a useful barometer of investor priorities, corporate governance trends, and emerging areas of potential D&O risk. This year, however, the proxy season also provided a glimpse into what may become a fundamentally different shareholder activism landscape.

On June 5, 2026, the Cooley law firm published its 2026 Shareholder Proposal Season Early Review and Look Ahead to 2027 (Cooley Report).  The report provided a mid-season review of 2026 shareholder proposals, showing, in part, that proposal activity continued several trends that have been developing over the last several years, including declining environmental and social proposal volume and continued steady support for governance-related proposals.

But Cooley’s most significant observations may have less to do with proposal outcomes than with procedural and regulatory changes. The report suggests that a combination of SEC policy changes, increased litigation, and evolving activist tactics could result in a more adversarial environment for companies and their directors in the years ahead. The following discusses certain Cooley Report findings and potential impact to D&O exposure.

The 2026 Proxy Season

The most significant backdrop to this year’s proxy season was the SEC staff’s November 2025 announcement that it would largely cease issuing substantive responses to Rule 14a-8 no-action requests. Historically, companies seeking to exclude shareholder proposals from proxy materials often sought no-action relief from the SEC staff, which effectively acted as an informal arbiter of proposal disputes. Under the staff’s revised approach, companies may still seek to exclude proposals, but they do so without the same degree of regulatory guidance and certainty.

Despite concerns that the SEC’s withdrawal from the process would dramatically alter proposal outcomes, the Cooley Report found that overall proposal trends remained remarkably consistent with recent years. Total proposal volume declined year-over-year, driven largely by reductions in environmental and social proposals. Governance proposals remained steady and continued to receive the strongest shareholder support.

Among the most notable developments were significant increases in proposals seeking independent board chairs, expanded shareholder written-consent rights, and enhanced special meeting rights. Several governance proposals achieved majority support during the season, including proposals seeking elimination of supermajority voting provisions and expansion of shareholder rights.

By contrast, environmental and social (ESG) proposals continued to decline both in volume and, generally, in shareholder support. While climate-related and environmental proposals remain a significant feature of the governance landscape, investor enthusiasm for many traditional ESG initiatives appears to have moderated considerably compared to the levels seen several years ago. 

The report also notes an emerging category that may become increasingly important in future proxy seasons: artificial intelligence. AI-related shareholder proposals increased during 2026, reflecting growing investor interest in board oversight, governance, risk management, and disclosure practices surrounding AI deployment and use.

We have discussed both the shift in D&O risk stemming from corporate ESG initiatives and fragmented state and international regulation on The D&O Diary.  We have similarly chronicled how AI disclosures are becoming a focal point for shareholders and securities plaintiffs.

The Shift from Proposals to Litigation

From a D&O liability perspective, perhaps the most significant finding in the report involves the growing role of litigation in shareholder proposal disputes.

The Cooley report notes that six lawsuits were filed during the 2026 proxy season challenging company decisions to exclude shareholder proposals. While that number may appear modest, it represents a meaningful shift in which several of the lawsuits resulted in settlements or court rulings requiring companies to include previously excluded proposals in their proxy materials.

For directors and officers, this development is noteworthy because it creates a new source of governance-related litigation risk. Decisions regarding proposal exclusions may become subject to judicial review, which could increase defense expenses and result in additional opportunities for activists to challenge board decisions.

Activists Are Increasingly Targeting Directors

Another important observation in the Cooley Report for D&O underwriters to consider is that shareholder proponents are increasingly experimenting with tactics that focus directly on directors rather than on proposals alone.

The report identifies several emerging strategies, including litigation challenging proposal exclusions; “zero-slate” campaigns conducted outside the traditional Rule 14a-8 framework; withhold campaigns targeting directors; public pressure campaigns; and efforts to advance binding bylaw amendments.

These developments suggest that activists may increasingly view director elections and board composition as more effective tools than shareholder proposals themselves. If that trend continues, directors could find themselves becoming the primary targets of shareholder dissatisfaction, particularly in connection with controversial governance, ESG, political spending, AI oversight, or disclosure issues.

For D&O insurers, this shift may prove significant. Campaigns focused directly on directors can increase the likelihood of books-and-records demands, derivative litigation, fiduciary-duty claims, and election-related disputes.  All of which have the potential to impact Side A coverage and impair D&O policy limits.

Looking Ahead to 2027

The report concludes by noting that the SEC continues to consider broader revisions to Rule 14a-8, including the possibility of substantial reform or even repeal. While any such effort could face significant legal and procedural challenges, the prospect alone is already influencing shareholder and activist behavior.

Ironically, reducing the availability of shareholder proposals may not reduce shareholder activism. Instead, it may simply redirect activist energy into litigation, proxy contests, director-election campaigns, and other forms of pressure that are potentially more disruptive and costly than traditional shareholder proposals.

That possibility represents the most significant D&O exposure takeaway from this year’s proxy season. For boards and their advisors, the key lesson may be that the traditional shareholder proposal process, which has long served as a pressure-release valve within the corporate governance system, has shifted to a more litigation-oriented and director-focused form of activism.

As a result, the most important story from the 2026 proxy season may be the emerging evidence that the next generation of shareholder activism is likely to be fought less through proxy statements and more through courts, director elections, and governance battles that strike at the heart of board oversight itself.

One of the common situations in which D&O insurance is called into play is when a company’s board has been hit with a shareholder derivative lawsuit. In the following guest post, Geoffrey B. Fehling and Charlotte E. Leszinske examine a recent derivative suit and consider the D&O insurance issues that can arise in the derivative lawsuit context. Geoff is a Partner, Hunton Andrews Kurth LLP, and Charlotte is an Associate, Hunton Andrews Kurth LLP. A version of this article previously was published as a Hunton Andrews Kurth client alert. My thanks to Geoff and Charlotte for allowing us to publish their article as a guest post on this site. Here is the authors’ article.

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A recent lawsuit underscores the threat posed by rogue shareholders and the importance of obtaining adequate D&O insurance to address those risks. Derivative claims—i.e., shareholder lawsuits brought on behalf of the company against its officers, directors, and managers—are not just costly to defend and resolve in court.  They can also divert precious internal resources, impede normal business operations, harm commercial relationships, hurt market confidence, and directly impact share prices.

Unfortunately, these concerns are not theoretical.  One recent California federal lawsuit alleges a pattern of extortion by a man who purchased small stakes in public companies and then weaponized his shareholder status to threaten financial harm if the company did not do as he said.  While the allegations against this particular serial litigator for extortion, racketeering, and fraud may seem extreme, they nevertheless underscore how a good D&O policy can protect companies and their directors and officers from exposure.

Background

A recently-filed federal complaint, Maddox Defense, Inc. and Envirotech Vehicles, Inc. v. Diveroli, et al., No. 26-cv-2992, alleges that a corporate shareholder used his status to pressure the company into business deals that would benefit him personally.  The complaint alleges multiple schemes by the shareholder to bilk the companies out of funds, including frivolous lawsuits, seeking to freeze corporate bank accounts, and asking for restraining orders against individual directors. 

According to the complaint, the shareholder acquired stock in the company for the purpose of extorting it.  The company had secured a lucrative government contract to supply medical gowns during the COVID-19 pandemic.  The shareholder allegedly held himself out as the company’s agent related to this contract, which caused significant harm to the company, including by scaring off potential business partners. 

Squabbles over this conduct allegedly culminated in a three-year derivative lawsuit by the shareholder against the company.  That suit sought remedies that significantly interfered with corporate operations, like asking that bank accounts be frozen and individual executives be restrained.  The shareholder-plaintiff then dangled multiple business opportunities before the company, offering to dismiss the lawsuit if the opportunities went forward.  When they did not, the shareholder escalated his pressure campaign.  At one point, the shareholder’s counsel allegedly admitted that the shareholder was just after money and if not paid to go away, he would continue his course of conduct. 

Mitigating Shareholder Risks With D&O Insurance

D&O insurance, which protects companies and their boards and management against claims challenging management decisions, is uniquely poised to mitigate risks caused by rogue shareholders.  Here are some of the top coverage considerations when facing similar shareholder claims.

Defense Coverage Is Critical.  Even if claims are frivolous or pursued in bad faith, as alleged in Diveroli, shareholder disputes can prove very costly. When placed in a defensive posture, policyholders still need to retain counsel and present a defense. Getting a suit dismissed on an early motion can still run up six- or even seven-figure legal bills depending on the size and scope of the claims.

That is why negotiating robust defense coverage in D&O policies is critical. Common provisions governing the duty to defend, notice, consent, panel counsel, rate caps, and allocation can materially impact the benefits received under the policy to defray significant costs and mount a successful defense.

Don’t Underestimate the Importance of Side A Coverage.  Derivative claims like those identified in the Diveroli lawsuit present unique D&O coverage issues because indemnification may be legally limited, unavailable, or impracticable for settlements or judgments, leaving the individual director or officer defendants to rely exclusively on the company’s D&O policy to protect them from personal exposure.  Even where the company is permitted to advance legal fees to defend derivative claims, indemnification may be restricted by company bylaws, public policy, or governing law.

As a result, shareholder derivative claims often implicate “Side A” coverage, which protects individual directors and officers against losses the company cannot indemnify.  If a company purchases only “Side ABC” policies that cover both the entity and individuals, claims against the company could erode or exhaust limits that otherwise would be available to protect individuals from non-indemnified derivative liabilities.

For those reasons, consider purchasing dedicated Side A limits, which are often available as part of Side ABC policies to set aside coverage available exclusively for the benefit of officers and directors.  Or better yet, consider a standalone Side A policy, which can provide not only dedicated limits but also enhanced coverage, fewer exclusions, and special features (such as “difference in conditions” coverage) not available under traditional Side ABC policies.

Audit Common Traps in Traditional Side ABC Policies.  At each placement and renewal, take a look at D&O policies with an eye towards derivative liability.  Here are some key questions to consider:

–  Does the “insured v. insured” exclusion have appropriate carve-outs for derivative claims brought in the name of the company against other insureds?

–  Is the policy’s definition of “loss” sufficiently broad to include remedies often claimed in derivative litigation?

–  How does the policy allocate between covered and uncovered matters in claims brought against both the company and individuals?

–  Since derivative and similar fiduciary litigation often intensify around distress situations, how will the company’s D&O insurance program respond during bankruptcy, and are there improvements to implement with an eye towards bankruptcy?

D&O policies are heavily negotiable and customizable.  But the time to review and improve policies is during renewal, not on the eve of closing, in the immediate lead-up to a bankruptcy filing, or after a claim is made.

Consider Useful Coverage Extensions.  Many putative shareholder claimants start making demands on the company or board long before a derivative suit is filed.  Those pre-litigation matters can involve shareholder demand letters, Section 220 and similar books-and-records demands, interview and document requests targeting specific individuals, and special committee or board investigations.  Policyholders may be able to negotiate extended coverage for pre-claim inquiries, books-and-records demands, and special committee investigation costs.

Conclusion

While shareholder litigation can present significant risk, that risk can be mitigated with D&O insurance.  Companies should consider obtaining D&O insurance and carefully review existing policies to determine their coverage in the event of a claim.

As we teased in our 20th Anniversary post, the D&O Diary Podcast launched earlier this week. We recognize that content is consumed across a variety of media, and we are grateful to our community for suggesting that we record a podcast discussing D&O Diary topics.

In our first episode, we discuss private credit and its growing impact on risk, governance, and insurance. Recording a podcast—even on a topic we have written and spoken about at length—was not easy and required many takes.

It was important to us that, like the D&O Diary, our podcast series be very much “handmade” and include topics of interest from the world of D&O liability. While we already have ideas in the pipeline and look forward to improving with each conversation, we would value our readership’s feedback.

Please listen, subscribe, and let us know what you think—we want to get better.

Listen now on:

Apple Music: https://podcasts.apple.com/us/podcast/private-credit/id1896880954?i=1000771217187

or

Spotify: https://open.spotify.com/episode/40YmPf6IsSLhuU5myGPVY3?si=1ghP7LyHQQeYrqZJvbrmxw

And stay tuned for our upcoming episode, where will discuss AI-related D&O risks and exposures.

Thank you for your support!

D&O Diary readers are likely familiar with the following pattern involving short seller reports: the short seller publishes attention-grabbing revelations about the operations or financial results of a listed company; the company’s shares decline; and a plaintiffs’ securities class action law firm files a securities class action lawsuit, often based solely on the accusations in the short seller’s report.  However, in a lawsuit filed on May 1, 2026, in the Southern District of Florida, Starfighters Space, Inc. (Starfighters) and related entities flipped the script. Starfighters complaint against purported short sellers alleges a coordinated “short-and-distort” campaign involving the publication of a purported research report and its amplification across social media platforms (Starfighters Lawsuit).  

While the Starfighters Lawsuit is framed in terms of defamation, securities fraud, and market manipulation, the case could raise broader issues relevant to D&O risk analysis for companies considering a similar approach. The below discusses the complaint’s allegations in more detail, as well as whether using litigation as a defensive tool against short sellers may, in and of itself, create D&O exposure.

The Starfighters Lawsuit

According to the Starfighters Lawsuit, unidentified defendants orchestrated a deliberate market manipulation scheme designed to profit from a decline in the company’s stock price.  The complaint alleges the defendants took short positions in the company’s stock and then published a report under the pseudonym “Umibōzu Research” containing what the plaintiffs contend were materially false and misleading statements about the company’s business, leadership, and financial condition. The report was disseminated through a dedicated website and further amplified through posts on X, with the alleged goal of inducing investor panic and driving down the company’s share price. The complaint notes that the report itself disclosed a short position, and that the timing and promotion of the content were designed to maximize market impact.  

The alleged impact on Starfighters was immediate and significant. The complaint asserts that the company’s stock price declined by more than 20% in the days following the report’s publication, coinciding with increased short interest and covering activity. The plaintiffs contend that the report included numerous false and defamatory statements concerning corporate governance, operational capabilities, affiliate relationships, and management qualifications.

Starfighters asserts a wide range of claims, including libel, violations of the federal securities laws (including Rule 10b-5 and Regulation M), deceptive trade practices, tortious interference, and civil conspiracy. The complaint also seeks injunctive relief aimed at halting further dissemination of the allegedly false statements and compelling their removal.

Discussion

One of the most notable aspects of this case is the company’s decision to pursue affirmative litigation against anonymous actors. Traditionally, companies targeted by short seller reports have relied on public statements, investor communications, and, in some cases, regulatory engagement to respond.

However, affirmative litigation may present certain advantages. By filing a lawsuit, a company may be able to use discovery tools to identify otherwise anonymous defendants, uncover trading activity, and potentially establish the existence of coordinated conduct. The act of filing suit may also serve as a signal to the market that the company disputes the allegations and is willing to defend its reputation aggressively.

At the same time, companies pursuing affirmative litigation should be mindful of the potential for what is often referred to as the “Streisand Effect,” that is, efforts to suppress, challenge, or discredit a statement can inadvertently amplify attention to it. By filing suit and publicly contesting a short seller’s allegations, a company may draw additional media, investor, and analyst focus to the underlying claims, including audiences that otherwise might not have taken notice. In this way, litigation itself can contribute to the broader dissemination and persistence of the allegations in the public domain, potentially intensifying market reaction and increasing the likelihood of follow-on scrutiny or claims.

An immediate concern for D&O underwriters arising from situations like this is the potential for follow-on securities class action litigation. Highlighting a stock price decline, combined with public allegations of misconduct, may create the type of fact pattern attracts the unwanted attention of plaintiffs’ securities lawyers.

Even where a company vigorously disputes the allegations, the existence of a detailed report and a measurable stock price impact may be sufficient to trigger claims that investors were misled or that material risks were not adequately disclosed. Moreover, the company’s own responses, whether in litigation filings or public disclosures, may be scrutinized for consistency and completeness. Statements made in an effort to rebut allegations could later be recharacterized as misleading if subsequent developments suggest that the issues were more complex than initially presented.

In addition to potential securities claims, an affirmative complaint against short sellers might also give rise to shareholder derivative litigation. Plaintiffs in derivative suits could allege that the company’s board failed to exercise adequate oversight over key areas, including disclosure practices, relationships with advisors or affiliates, and responses to known risks.

Allegations relating to corporate governance, affiliate relationships, and operational practices, could form the basis of derivative claims. And, by engaging directly with these allegations in a public forum the company potentially could elevate them into matters of record, potentially providing a roadmap for future claims. Even if such claims ultimately lack merit, the allegations may lead to D&O expense exposure and potential reputational harm.

Another important consideration is the challenge of managing disclosures in the face of short seller allegations. Companies must strike a careful balance between defending themselves and avoiding statements that could later be challenged. When a company responds to allegations by making definitive statements about its operations, financial condition, or governance practices, those statements may themselves become subject to investor scrutiny.

If later information reveals that some of the company’s claims about the short seller were supported by facts, shareholders may contend that the company’s earlier statements were misleading.

It is important to note that a company’s affirmative claims are unlikely to be covered under traditional D&O policies, which generally respond to claims against insured persons rather than claims initiated by the company. However, the same underlying circumstances may give rise to covered claims, including securities class actions, derivative suits, and regulatory investigations.

In addition, from a D&O coverage perspective, timing of notice to insurers becomes critical. The publication of a short report and a resulting stock price decline may constitute circumstances that should be reported under applicable policies, even before any formal claim is filed. Failure to provide timely notice could complicate coverage for subsequent claims.

As short seller activity increasingly intersects with social media and anonymous publication platforms, companies could face new forms of reputational and financial pressure. Affirmative litigation may offer a means of responding to these challenges, but it is not without its own risks. By bringing disputes into the courtroom, companies may invite additional scrutiny, create opportunities for follow-on litigation, and complicate their D&O exposure.

Over the last several years, the United States Supreme Court has issued a series of decisions addressing the SEC’s powers to seek disgorgement against alleged securities law violators. Last Thursday, in the latest decision in the recent series, the Court issued a unanimous decision holding in Sripetch v. SEC that the SEC can seek disgorgement as a remedy even if the agency cannot prove that investors suffered a financial loss. The decision, which resolves a split between the federal judicial circuits on the issue, represents an affirmation of the SEC’s disgorgement authority. The Supreme Court’s June 4, 2026, ruling can be found here.

Background

Ongkaruck Sripetch was one of fifteen defendants named in a civil SEC enforcement lawsuit, in which Sripetch was charged with six counts of securities fraud and one count of selling unregistered securities. Sripetch agreed to a consent judgment on the merits but resisted the SEC’s disgorgement request. The district court granted the SEC’s disgorgement request, stating that it “assumed without deciding” that a showing of investors’ pecuniary harm was required in order for disgorgement to be ordered, concluding that the SEC “had made the requisite showing.”

The court ordered disgorgement of approximately $2.5 million, as well as prejudgment interest of over $1 million. Sripetch appealed the district court’s order regarding disgorgement.

The Ninth Circuit affirmed the district court but on differing grounds. The Ninth Circuit, unlike the district court, addressed the statutory question on what the SEC must show in order to obtain disgorgement, holding that “pecuniary harm” to investors was not a “precondition” to disgorgement under the relevant statutory provisions, stating that it did not matter whether the SEC established pecuniary harm.

The Ninth Circuit expressly recognized that a split between the circuits exists on the question of whether or not the SEC must show the existence of pecuniary harm to investors in order to obtain disgorgement. The First Circuit, with which the Ninth Circuit agreed, has held that a finding of pecuniary harm is not required. The Second Circuit, whose rulings the Ninth Circuit rejected, had found that the disgorgement remedy is only available if an individual or entity suffered pecuniary harm as a result of the defendant’s wrongdoing. The Ninth Circuit, agreeing with the First Circuit and rejecting the Second Circuit, found that under the relevant statutory provisions “a claimant need not show any loss whatsoever, let alone a pecuniary loss.”

Sripetch filed a petition to the United States Supreme Court for a writ of certiorari, in reliance on the split in the judicial circuits. In an unusual development, the SEC did not oppose Sripetch’s cert petition, stating in its response that the question presented was “recurring and important,” and that the circuit split presented a significant problem for the agency.

As discussed here, on January 9, 2026, the Supreme Court granted Sripetch’s petition. The question presented is “Whether the SEC may seek equitable disgorgement under 15 U.S.C. 78(u)(d)(5) and (7) without showing investors suffered pecuniary harm.”

The Court’s Decision

On June 4, 2026, in an opinion written by Justice Neil Gorsuch for a unanimous court (with Justice Clarence Thomas joining the majority but concurring in a separate opinion), the Supreme Court affirmed the Ninth Circuit, agreeing with the Circuit Court that a showing of pecuniary loss is not required before the SEC may obtain a disgorgement award.

Justice Gorsuch said, in reliance on case authority from a variety of jurisdictions, that courts have long required defendants to disgorge ill-gotten gains even without proving that the plaintiff was financially disadvantaged by the defendant’s conduct. What the cases show is that “applying traditional equitable principles, a court ordered the defendant to disgorge the value of the gain attributable to his invasion of the plaintiff’s legally protected interests without requiring a showing of pecuniary loss.”

Sripetch had argued that the Court’s 2020 decision in Liu v. SEC (discussed in detail here), which held that disgorgement must be “awarded for victims,” required that a showing of pecuniary loss was necessary before a person may qualify as a “victim” entitled to an award of the wrongdoer’s profits. The Court rejected this argument, saying that in some instances “a defendant can enrich himself even without leaving a plaintiff worse off financially.”

Justice Thomas joined in the Court’s holding that a showing of pecuniary loss is not required to support disgorgement. However, he separately argued that under the provisions of the Exchange Act, disgorgement is now a legal rather than an equitable remedy, and therefore that a defendant from whom the SEC is seeking disgorgement is entitled to a jury trial under the Seventh Amendment.

Discussion

One reason it is always interesting when the Supreme Court agrees to take up a securities law case – something that happens relatively rarely – is the possibility that the Court might say something that is redefining about the securities laws or that will have a significant impact. As it has turned out, the Court didn’t say or do any of that in this case.

The Court’s ruling addressed a narrow issue relevant to a relatively narrow category of cases – that is, cases in which the SEC seeks disgorgement where the victims suffered no financial loss. This issue has come up often enough that there was a circuit split on the issue, but otherwise it is likely to come up in only a narrow subset of cases.

The Court said little beyond the immediate issue. Indeed, the Court identified, without addressing, a number of other issues that might come up in other disgorgement cases, clearly reserving those other questions for another day.

Perhaps the more important thing about this decision is that it affirmed the SEC’s assertion of its disgorgement authority. It is to that extent arguably different from the Supreme Court’s two most recent prior cases discussing the agency’s disgorgement authority.

As noted above, the Liu case identified a restriction of the agency’s authority (that it applies only if there are “victims”). In its 2017 decision in Kokesh (discussed here), the Court said the SEC’s disgorgement authority was subject to a five-year statute of limitations. Thus, the two prior SEC disgorgement-related decisions recognized limitations on the SEC’s disgorgement authority, whereas in this latest case, the Court rejected the petitioner’s argument for further limitations on the agency’s disgorgement authority.

The Court’s decision in the Sripetch case reinforces the view that the SEC has potent power in its disgorgement authority. SEC observers, commenting on the reduced amounts of enforcement activity overall under the current administration, might question the continued relevance of this authority now. However, the current SEC leadership has voiced its intent to seek to protect victims of investor fraud, and to that extent at least the agency’s  disgorgement authority remains highly relevant.

The case before the Supreme Court did not directly involve D&O insurance issues. However, the question of whether D&O insurance is available to indemnify companies for amounts the companies are ordered to pay by way of disgorgement is a recurring one (as discussed most recently here).

In various recent decisions in insurance coverage disputes involving questions about disgorgement, the U.S. Supreme Court’s recent pronouncements about the SEC disgorgement authority have played an important role. It seems likely that the Sripetch decision will continue this tradition; in particular, I suspect strongly that parties in future coverage disputes about disgorgement will reference the Sripetch decision – specifically, the opinion’s various references to “ill-gotten gains.”

One of the more noteworthy recent trends in corporate law has been the push for companies (particularly companies incorporated in Delaware) to consider reincorporating elsewhere (primarily Texas or Nevada). A number of companies have in fact changed their state of incorporation. Arguably the biggest move of all is ExxonMobil’s recent action to reincorporate in Texas, which the company’s shareholders approved in May. The company’s change in its state of incorporation after roughly 140 years of corporate existence is a noteworthy development, and worth considering further.

One of the main reasons Exxon’s move is worth further examination is that Exxon’s move is different in key ways from the actions of many of the other companies that have reincorporated in recent months.

For starters, Exxon’s move is not a “DExit” – Exxon was not previously incorporated in Delaware, it was a New Jersey corporation. Its predecessor company (Standard Oil of New Jersey) incorporated in New Jersey in 1882, at a time when New Jersey was a leading state for incorporations and the state’s laws were perceived as permissive.

The fact that Exxon’s reincorporation is not a move away from Delaware is worth considering. Much of the current dialogue about whether or not states should reincorporate originates in reactions against certain recent Delaware court decisions. Exxon’s move has nothing  to do with any of that. Indeed, Exxon’s move not only doesn’t have anything to do with Delaware, it really doesn’t have anything to do with New Jersey, either. Exxon may have had its reasons for making the move to reincorporate in Texas, but the move really does not represent a move away from New Jersey. It is mostly a move toward Texas.

One reason Exxon frequently cited for reincorporating in Texas is to align its legal existence with its operational reality. The company moved its corporate headquarters to Texas in 1989. The company portrayed this aspect of its move as “real world alignment.” However, as discussed further below, there definitely were legal as well as practical motivations for the company’s decision to reincorporate in Texas.

Before I get into the legal considerations of Exxon’s move, there is one other way in which Exxon is different from many of the other companies that in recent months have chosen to reincorporate to Texas or Nevada.

With respect to the other companies, I want to alert readers to a great resource. University of Nevada Las Vegas Law Professor Benjamin Edwards has been tracking company reincorporations on the Business Law Prof Blog. On June 1, 2026, Edwards posted the latest update to his list of company reincorporations. Professor Edwards’s list shows that 36 companies have reincorporated in 2026 (inclusive of four companies that decided to move in 2025 but whose shareholders approved the move in 2026).

A quick review of Edwards’s list shows that many of the companies that have chosen to move their state of incorporation are smaller, founder-controlled companies, and companies that have faced corporate litigation. Exxon arguably represents something quite a bit different. (Although Exxon certainly has had its share of litigation.) Exxon is a large, widely-held mainstream company. It is not founder controlled.

The significance of Exxon’s move is not in its move away, rather, the significance is in what it was moving toward. What Exxon’s move signifies is that we are now in an era of competition between the states to be companies’ legal homes. And with the entry of Exxon into the lists, the state competition has now gone mainstream. The question we all need to ask in the wake of Exxon’s move is: will Corporate America follow in Exxon’s footsteps?

In considering whether there are implications for Corporate America in Exxon’s move, it is important to consider some of the other reasons Exxon chose to move. It was not just the practical consideration of aligning the company’s legal existence with its operational reality. Exxon chose Texas for legal reasons as well. Those reasons included such things as Texas’s recently modernized business code, and its newly established dedicated business courts. Texas’s laws arguably allow companies to better manage litigation risk and reduce the likelihood of shareholder litigation. The case for Texas is that it is – in the eyes of some — innovative and business-friendly. Exxon also argued that Texas is a jurisdiction that understands its business better. It could be argued that Exxon’s move legitimizes Texas’s recent bid to become a magnet for company incorporations.

To be sure, there were those (including for example, the leading proxy advisors) who opposed the company’s move, precisely because, as the opponents saw it, the move to Texas would weaken corporate governance controls and potentially even entrench company management. Indeed, much of the argument against Exxon’s move was precisely due to concerns that it could legitimize Texas (or other jurisdictions) as corporate alternatives, and thereby encourage other participants in Corporate America to consider the same or a similar move as Exxon just did.

Policy theorists can debate all they want about whether the move toward corporate reincorporations is a good or a bad thing. But the reality is, as the Wall Street Journal noted in a June 1, 2026 editorial (here), “the policy differences between the states are becoming wider.” Companies, like Exxon, are considering making a move based on a perception that there are differences between the states, and those differences matter.

What I think Exxon’s move does is that it puts on the table the question whether or not legal domicile is, as the Journal editorial puts it, “an issue in corporate governance.” Indeed, the Journal article goes further, and affirmatively raises the question: “Is it becoming a corporate governance duty to leave states that punish business for states that don’t?”

I doubt there is a legitimate legal basis for corporate boards to be sued for choosing (or failing to choose) one state as compared to another state as the company’s legal domicile. However, there nevertheless is a valid question about whether companies in different jurisdictions face different levels of litigation risk. This is a question that has always been involved in the choice of the state of incorporation. And it is a question that potentially matters a lot more now, if Exxon’s move does have implications for the rest of Corporate America.

To be sure, there has been some legitimate concern that the entire “DExit” debate is overblown. At most, to date, it has involved a few dozen companies. There have, so far, been few signs of some kind of mass migration away from Delaware. Indeed, in 2025, incorporations in Delaware actually increased sharply, rising about 30 percent compared to 2024. Not only are many companies choosing Delaware, there is a good case to be made that companies should choose Delaware – its traditions, its deep and established case law, its experienced judiciary, and so on.

For D&O insurance professionals, there is an embedded question in all of this – if companies are choosing where to incorporate based, among other things, on perceptions of varying litigation risk between the states, should the state of incorporation be a factor in D&O insurance risk selection and pricing? I think this is a question worth asking, but we are nowhere near having enough data to actually answer the question. Until there is more experience and case law demonstrating that companies incorporated in Nevada and Texas have a measurably reduced litigation risk, I don’t think the insurers will be in a position to confidently use the state of incorporation as a risk selection or pricing factor. At least not yet. Maybe someday? Soon?

But while we may not yet be in the position to answer the question, there is a chance that the question may start to matter a whole lot more, if Corporate America does sit up and take notice of what Exxon has done, and more mainstream companies start to make the move to other states that are perceived as business-friendly – and in particular are perceived as having a better litigation environment.

Over the last several years, artificial intelligence (AI) has evolved into a central component of many companies’ growth strategies. As organizations increasingly integrate AI into their operations, products, and business models, the associated litigation risks have begun to emerge as well. The D&O Diary has been tracking the rise of AI-related litigation, from early AI-washing cases to a growing number of securities suits involving AI infrastructure investments, AI-enabled business models, and AI-related disclosure issues.

The emergence of these lawsuits raises an important question for D&O insurers and underwriters. How should they evaluate AI-related risk? More specifically, can underwriters realistically keep pace with a technology that is evolving as rapidly and broadly as artificial intelligence? Thus, AI presents challenges that may not lend themselves to traditional underwriting approaches. Indeed, the more interesting question may be whether AI represents a category of risk that can be understood and assessed through conventional underwriting methods.

The Litigation Has Moved Beyond AI-Washing

When AI-related litigation first began attracting attention, many securities claims involved what became known as “AI-washing,” allegations that companies exaggerated their AI capabilities or overstated the role artificial intelligence played in their businesses.

However, the plaintiffs’ bar has already moved beyond traditional AI-washing theories. Securities lawsuits have been filed against AI infrastructure companies, data center operators, power generation providers, lending platforms, and software companies whose AI-related initiatives allegedly failed to perform as represented. In these cases, AI is often not the central issue. Instead, AI becomes intertwined with disclosures concerning revenue growth, capital expenditures, operational efficiency, customer adoption, or business strategy.

That distinction matters. These cases increasingly resemble traditional securities lawsuits involving disclosure issues and strategic execution rather than technology-related claims. The allegations often center on whether management accurately described the opportunities and risks associated with AI initiatives and whether investors received sufficient information regarding the challenges involved in implementing those strategies.

As AI becomes more deeply embedded in corporate operations, it seems likely that this trend will continue. Future litigation may increasingly focus on governance, oversight, capital allocation, disclosure practices, and business judgment rather than on the technology itself.

AI Is Not One Risk

One of the challenges facing underwriters is that artificial intelligence is often discussed as though it were a single category of risk. However, AI encompasses a wide range of technologies with significantly different risk profiles.

Many organizations today deploy predictive AI, generative AI, agentic AI, autonomous systems, or combinations of several different technologies. While these systems are often grouped together under the broad heading of artificial intelligence, they create distinct operational, regulatory, and governance concerns.

Predictive AI has been used for years in industries such as healthcare, financial services, and insurance. These systems rely on historical data to identify patterns and forecast outcomes. The associated risks often involve bias, inaccurate predictions, model drift, and regulatory scrutiny regarding decision-making processes.

Generative AI creates an entirely different set of concerns. Because these systems generate content, they raise issues involving intellectual property rights, misinformation, hallucinations, copyright infringement, and disclosure accuracy. Many of the legal disputes currently attracting attention involve these types of risks.

Agentic AI introduces yet another layer of complexity. These systems increasingly are designed not merely to generate information but to take actions, make decisions, and interact with other systems with limited human intervention. Questions regarding accountability, oversight, authorization, and control become increasingly important as organizations deploy technologies capable of acting independently.

Autonomous systems present perhaps the broadest set of challenges. Whether operating in transportation, manufacturing, logistics, healthcare, or critical infrastructure, autonomous technologies can create consequences that extend far beyond traditional technology-related losses and implicate multiple lines of insurance.

The diversity of these technologies helps explain why AI underwriting remains a work in progress. Underwriters are not evaluating a single risk. They are evaluating an evolving collection of risks that continue to change as the technology itself develops.

What Underwriters Can Underwrite

Many AI-related D&O exposures involve areas that underwriters have evaluated for years. The key questions frequently involve governance, oversight, disclosure controls, and risk management rather than the underlying technology itself.

For example, underwriters increasingly may focus on how central AI is to a company’s business model. Is AI a core driver of revenue growth? Is it embedded within existing products? Or is it still experimental? Companies that position AI as a primary growth engine may face different disclosure risks than organizations using AI as a supporting operational tool.

Similarly, governance practices may become increasingly important. Does the board receive regular updates regarding AI initiatives? Are there established governance frameworks governing AI deployment? How are risks escalated? What controls exist around model validation, data governance, vendor oversight, and regulatory compliance?

Disclosure practices may prove especially important. Many of the AI-related lawsuits filed to date involve allegations that companies overstated opportunities, understated risks, or failed to adequately explain the limitations associated with AI initiatives. As a result, underwriters are likely to pay increasing attention to the relationship between a company’s internal understanding of its AI capabilities and its public statements regarding those capabilities.

These are all familiar D&O underwriting concepts. While the technology may be new, the underlying concerns surrounding governance, oversight, and disclosure are not.

The Limits of Underwriting AI

The challenge is that AI risk is not necessarily confined to a company’s own activities. An organization may face AI-related risks arising from competitors, customers, vendors, regulators, or broader market developments that are difficult to predict and even harder to quantify.

A company’s AI strategy may succeed, but a competitor’s strategy may prove more effective. Customers may change their purchasing behavior because of AI-driven market shifts. Regulators may introduce new compliance obligations. Vendors may alter the functionality of third-party AI systems on which companies rely. In some industries, the greatest AI-related risk may not come from adopting AI too aggressively but from failing to adapt quickly enough.

Traditionally, when underwriters encounter uncertain risks, they have several options available. They can avoid exposure, narrow coverage, or charge additional premium to compensate for uncertainty. None of those solutions is particularly easy in the current environment.

AI is becoming so pervasive that avoiding any exposure from AI entirely may be impossible. Even companies that are not actively developing AI products are increasingly affected by AI-driven changes occurring throughout their industries. As a result, underwriters may find themselves confronting a category of risk that is both highly consequential and inherently difficult to model.

This reality suggests that a degree of underwriting humility may be appropriate. Artificial intelligence is not merely an emerging technology risk; it is increasingly reshaping business models, competitive dynamics, customer behavior, regulatory expectations, and capital allocation decisions across industries. Some AI-related risks may be identifiable and measurable, while others may emerge from factors beyond a company’s direct control.

A competitor’s AI strategy, a regulator’s response to evolving technology, or a fundamental shift in customer expectations may ultimately prove as consequential as a company’s own AI deployment. In that environment, the challenge for underwriters may be less about perfectly quantifying AI risk and more about understanding the limits of what can reasonably be known and assessed.

Conclusion

It would be unrealistic to expect a single underwriting framework for AI to emerge in the near future. Artificial intelligence encompasses a broad range of technologies, industries, and use cases. A company developing foundation models presents a very different risk profile than a healthcare provider deploying AI-assisted diagnostics, a lender using predictive analytics, or a manufacturer utilizing autonomous systems. Given those distinctions, it is hardly surprising that insurers are approaching AI-related exposures from different perspectives.

Indeed, the diversity of underwriting approaches may ultimately prove to be a strength rather than a weakness of the D&O marketplace. One of the defining characteristics of the D&O insurance industry has always been the willingness of different insurers to reach different conclusions about the same risk. Differing underwriting philosophies, risk appetites, and pricing models create competition and allow insureds access to a broader range of coverage solutions.

The insurance industry has navigated emerging exposures before, including cyber liability, ESG-related risks, cryptocurrency, and SPAC litigation. In each instance, underwriting approaches evolved as claims experience developed and risk characteristics became better understood. Artificial intelligence may ultimately follow a similar path, though perhaps on a larger scale given its breadth and potential impact across industries.

Over time, AI may give rise to increasingly specialized underwriting approaches. Some insurers may develop expertise in companies that build AI technologies, while others may focus on organizations that use AI as a business tool rather than as a core product. Certain underwriters may place greater emphasis on governance structures and disclosure controls, while others may focus on regulatory exposure, intellectual property concerns, or operational risks associated with AI deployment. As claims experience develops and litigation trends become clearer, underwriting approaches are likely to evolve alongside the technology itself.

The challenge for underwriters is not necessarily to develop a single model for evaluating AI risk. Rather, it may be to determine which aspects of AI-related exposure can be meaningfully assessed while recognizing the limits of what can presently be known. In that respect, the future of AI underwriting may tell us as much about the adaptability of the D&O insurance industry as it does about artificial intelligence itself.

One final note. There is an entirely separate way in which AI represents a challenge to the D&O insurance industry, and indeed to the insurance industry as a whole. That is, corporate leadership must and undoubtedly are scrambling to figure out how to incorporate AI models, tools, and agents into brokering, underwriting processes and claims management. This issue is a huge topic and beyond the scope of this blog post. An issue for another day.

It is not news that operational setbacks can lead to securities litigation. Indeed, long-time securities litigation observers may recall that during the pandemic, supply chain disruption led to a raft of securities suits (as discussed, for example, here). The pandemic is long gone, but in its wake one vestige is the plaintiffs’ lawyers continuing proclivity to file securities suits against companies experiencing supply chain issues.

In the latest example, last week a plaintiff shareholder filed a securities suit against EV company Lucid, after the company reported that quality issues with a vendor’s vehicle component hampered the company’s vehicle deliveries during the first quarter of the fiscal year. As discussed below, the new complaint, based on problems in Lucid’s supply chain, raises several concerns. A copy of the May 29, 2026, complaint can be found here.

Background

Lucid designs and manufactures electric vehicles (EV). According to the securities lawsuit complaint, beginning in February 2026, the company made a series of statements in which it “touted purported enhancements to Lucid’s manufacturing and delivery capabilities,” noting that in the prior fiscal year the company had “implemented sustainable improvements … with respect to the production and ramp-up” of vehicle completions and deliveries. The company also allegedly asserted that these improvements would lead to profitable growth and performance efficiencies in FY26.

According to the complaint, contrary to the company’s alleged representations, the company’s performance “was materially hampered by significant supplier and delivery issues in February 2026,” putting the company on track for “dismal, rather than improved, performance” in the first quarter of FY26.

On April 3, 2026, the company announced its first quarter vehicle production and delivery totals, noting that the numbers were down compared to estimates. The company’s statement noted that “during the quarter, deliveries of the Lucid Gravity were disrupted for 29 days due to a supplier quality issue with the second-row seats,” as a result of which “the company’s ability to meet customer demand was impacted.” The company’s share price declined over ten percent on this news.

On April 14, 2026, the company released its preliminary first quarter financial results, including revenue figures well below the consensus estimates, with operating losses approaching $1 billion. According to the complaint, the company’s share price further declined on this news.

The Lawsuit

On May 29, 2026, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Lucid and certain of its directors and officers. The complaint purports to be filed on behalf of a class of investors who purchased the company’s shares between February 25, 2026, and April 13, 2026.

The complaint alleges that during the class period the defendants failed to disclose that “(i) a supplier quality issue had significantly disrupted deliveries of the Lucid Gravity; (ii) the foregoing was likely to, and did, have a material negative impact on the Company’s business and financial results; (iii) accordingly, the Defendants had overstated the purported enhancements to Lucid’s manufacturing and delivery capabilities and overall operations; and (iv) as a result, Defendants’ public statements were materially false and misleading at all relevant times.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.

Discussion

As I noted at the outset, supply chain woes followed in the wake of the pandemic, translating in turn into disappointing financial results and, by extension, into securities litigation.

While this lawsuit, like the pandemic-related suits, involves allegations of supply chain problems, there are important differences between this suit and the pandemic-era suits. For starters, the supply chain disruption in this suit was not the result of global economic disturbance. This case involves, at most, production issues at one of Lucid’s suppliers. Also, this suit, in contrast to the pandemic-era suits, did not involve suspension or absence of supply; rather, this suit involves supply that did not meet quality standards. To that extent, as well, this suit, in contrast to the pandemic-era suits, does not involve underlying macroeconomic concerns; it seems to reflect only manufacturing or delivery problems at a single supplier.

That said, this new lawsuit does reflect the reality that in the current litigation environment, even a simple operational setback can trigger a securities class action lawsuit. Those of us who remember the old days can recall that securities litigation used to involve allegations of financial misrepresentations or accounting fraud. None of that here. Just an allegation that the company had a disappointing quarter merely because of a quality control problem at one of its key suppliers. The complaint doesn’t even name the supplier or specify what the quality issues were.

This complaint has only just been filed, and it remains to be seen how it will fare. I will say this, though: when the time comes for the allegations in this complaint to be tested for legal sufficiency, the court will have to look long and hard to try to find anything that would satisfy the scienter requirement.

This is not the first time that Lucid has found itself caught up in a securities suit. Readers may recall that litigation followed the merger of Lucid, formerly a private company, with a publicly traded SPAC. The SPAC’s shareholders alleged that prior to the de-SPAC transaction, Lucid’s management allegedly had made misrepresentations about the EV company’s production and vehicle delivery capabilities. As discussed here, in August 2024, the Ninth Circuit ultimately concluded that the SPAC investors lacked standing to assert the claims against the pre-merger company’s management.

The SpaceX initial public offering has captured global attention, positioned to potentially become the largest IPO in financial history. Beyond its massive scale, the offering is drawing heavy scrutiny from corporate law experts and institutional investors due to the extraordinary measures implemented to isolate the company from D&O litigation. By embedding unprecedented “litigation-aversion” provisions within its Form S-1 registration statement, SpaceX is establishing a highly controversial precedent for how founder-led companies can systematically shield insiders from future shareholder challenges.

As The D&O Diary continues to track SpaceX’s anticipated IPO and the broader D&O implications of founder-led public offerings, Professor Ann Lipton’s recent commentary on the SpaceX S-1 raises critical questions regarding the balance between shareholder accountability and issuer efforts to curtail litigation rights before claims even arise.

The following discusses SpaceX S-1’s litigation management provisions, and the potential impact of such provisions on D&O underwriting.

SpaceX S-1

Over the past decade, companies planning public offerings have increasingly adopted structural protections to limit securities litigation exposure. This trend intensified following a surge in merger-objection lawsuits and parallel class actions filed under the Securities Act of 1933. This dual-forum litigation spiked after the U.S. Supreme Court’s ruling in Cyan, Inc. v. Beaver County Employees Retirement Fund. Cyan confirmed that state courts retain jurisdiction over Securities Act claims and that those actions cannot be removed to federal court.

To mitigate the resulting risk of duplicative state and federal lawsuits, issuers began implementing federal forum selection provisions (FFPs) and exclusive venue bylaws. The Delaware Supreme Court solidified the viability of this strategy in its landmark decision Salzberg v. Sciabacucchi (2020). The court held that charter provisions requiring federal Securities Act claims to be litigated exclusively in federal court are facially valid under Delaware law.

SpaceX S-1’s provisions, however, appear to go considerably further. The filing references Texas corporate law protections that may substantially narrow shareholder litigation rights, including provisions limiting derivative litigation and potentially requiring individualized arbitration of securities claims. Professor Lipton noted that these provisions, taken together, may dramatically reduce the practical ability of shareholders to bring collective claims.  

The broader significance may not necessarily lie in any one provision alone, but rather in what the filing represents: a continuation of the growing trend of companies attempting to preemptively narrow shareholder litigation pathways before entering the public markets.

The motivation behind SpaceX S-1’s litigation management provision appears relatively straightforward. IPO-related securities litigation remains one of the most severe categories of public company D&O exposure. Claims under Section 11 of the Securities Act of 1933 continue to pose substantial risks because plaintiffs generally do not need to prove scienter or reliance in the same manner required under Rule 10b-5. As a result, IPO-related claims often survive dismissal motions more readily and generate substantial defense and settlement costs.

High-profile, founder-led companies with high valuations and intense investor scrutiny face elevated litigation risks following operational or market disruptions, often stemming from unconventional leadership communication. The D&O Diary has extensively analyzed these risks through Elon Musk’s litigation, including the Tornetta v. Musk ruling on board independence and the “Funding Secured” securities trial.

From that perspective, it is unsurprising that companies like SpaceX would seek to reduce uncertainty before public trading begins. D&O underwriters, likewise, have spent years grappling with the severity of IPO-related claims, particularly in the wake of the SPAC litigation wave and the sustained rise in event-driven securities litigation.

Discussion

SpaceX’s IPO filing highlights an escalating tension in public company governance: how far issuers can go in reducing litigation exposure without undermining shareholder accountability. While litigation-management provisions have become increasingly common in IPOs, the scope and assertiveness of those reflected in the SpaceX S‑1 suggest a meaningful evolution, particularly among founder-led companies that already present heightened governance and disclosure risk.

Securities litigation has long served as a central enforcement mechanism in the public markets. Section 11 claims and fiduciary-duty actions provide investors with both a deterrent against misleading disclosures and a pathway for redress when governance failures occur. These mechanisms depend on collective action to remain economically viable. SpaceX’s approach, however, signals an effort to structurally narrow those pathways before public investors enter the capital structure. To the extent these provisions limit collective claims or constrain derivative litigation, they may reduce the practical viability of shareholder enforcement.

This tension is amplified when considered alongside dual-class share structures. Founder-led issuers frequently consolidate voting control, reducing shareholders’ ability to influence board oversight or strategic direction. When layered with litigation-deterrence provisions, the combined effect may be to restrict both voting power and legal recourse. The result is not merely a procedural shift, but a broader reconfiguration of the balance between management authority and investor protection.

From a D&O underwriting perspective, these developments present a mixed picture. On one hand, insurers have generally welcomed measures that reduce duplicative litigation and procedural inefficiencies. Federal forum provisions, for example, have proven effective in limiting the multi-forum exposure that emerged following Cyan. To the extent SpaceX’s provisions reduce claim frequency or improve early dismissal prospects, they may be viewed as a constructive risk-mitigating feature.

However, mitigating the D&O risk with use of litigation management provisions may be more limited than they initially appear. First, novel or expansive provisions are likely to be tested. Plaintiffs may challenge their enforceability or argue that their adoption constitutes a breach of fiduciary duty, particularly if they are perceived as overly restrictive. In that sense, litigation-management mechanisms may not eliminate exposure so much as redirect it into new and potentially complex forms of litigation.

Litigation provisions also may not address the core drivers of securities litigation risk. IPO-related claims remain closely tied to valuation volatility, disclosure quality, and post-offering performance. A high-profile issuer experiencing a material stock decline or operational setback will continue to attract plaintiff scrutiny, regardless of procedural barriers. Underwriters therefore must continue to focus on governance quality, board independence, and disclosure controls rather than relying on structural protections alone.

In addition, aggressive litigation limitations may themselves become part of the broader risk narrative. In a post-loss scenario, such provisions could be framed as evidence of reduced accountability or governance entrenchment, potentially influencing settlement dynamics and reputational exposure, particularly in founder-driven companies where leadership visibility heightens litigation sensitivity.  As noted in a May 29, 2026, WSJ Opinion, the broader significance may not necessarily lie in any one provision alone, but rather in what the filing represents: a continuation of the growing trend of companies attempting to preemptively narrow shareholder litigation pathways before entering the public markets.

Regardless of whether that trend continues, the question for D&O insurers is whether these provisions actually reduce risk or merely alter the form that future litigation will take. Carriers may increasingly distinguish between established protections, such as federal forum clauses, and more aggressive or untested provisions that introduce uncertainty. Greater emphasis is also likely to be placed on how these provisions interact with broader governance features, including dual-class structures and board oversight. These considerations may influence pricing, retentions, and coverage terms as underwriters recalibrate their approach to IPO risk.

Ultimately, SpaceX’s filing reflects a broader effort by issuers to proactively shape their litigation risk profile. Whether these strategies reduce D&O exposure or simply reshape it will depend on how courts, investors, and plaintiffs respond.

A common feature of many liability insurance policies is a specification that the policyholder may not settle a claim without the insurer’s advance consent. However, some policies, particularly professional liability insurance policies, may require the insurer to obtain the policyholder’s consent to settlement before settling a claim. A recent ruling in a litigated coverage dispute concluded that an insurer that had not obtained the policyholder’s consent before settling a claim on behalf of one but not all defendants had breached the insurance contract, as discussed below.

The Northern District of Illinois’s May 26, 2026, decision in the case, applying Illinois law, can be found here. A May 29, 2026, LinkedIn post by Geoffrey Fehling of the Hunton Andrews Kurth law firm can be found here.

Background

Kinsey & Kinsey is a consulting company. Brad Kinsey is one of the firm’s principals. Brian Thome was an employee of the firm. In 2015, Bellin Memorial Hospital retained the firm to install new software for the hospital. Problems ensued. Bellin sued the firm, Kinsey, and Thome in Wisconsin state court.

The firm submitted the lawsuit to its professional liability insurer. The insurer defended all three of the defendants. Thome had defense counsel separate from the firm and Kinsey. During the course of the underlying lawsuit, the insurer sought to settle on behalf of all three defendants, but Bellin rejected that proposed settlement. On the eve of trial, Bellin offered to settle solely with Thome, in exchange for the $1 million policy limits. The insurer accepted the proposed settlement, but it did not seek the consent of the firm or of Kinsey, though it did inform them it intended to accept the settlement. Kinsey and the firm objected to the settlement.

The underlying case went forward for the two remaining defendants. The insurer continued to defend the firm and Kinsey. Trial in the case resulted in a judgment against the firm for over $780,000. A variety of court proceedings followed, involving considerable procedural complexity. Ultimately, Kinsey sued its insurer, seeking to have the insurer reimburse the firm for the amount the firm paid pursuant to the underlying judgment. The parties filed a number of potentially dispositive motions, including cross-motions for summary judgment. Among other things, the firm argued that the insurer had breached its contract by failing to seek the firm’s consent before agreeing to the settlement.

Relevant Policy Language

The policy states that the insurer “shall not settle any claim without your consent, such consent not to be unreasonably withheld.” The policy defines “you” and “your” to mean: “1. The named entity. 2. Any subsidiary. 3. Any independent contractor while acting on your behalf but solely as respects the provision of professional services. 4. Any individual insured.”

The Court’s Opinion

In a May 26, 2026 opinion, applying Illinois law, Northern District of Illinois Judge Sharon Johnson Coleman entered a variety of rulings, including granting the firm’s motion for summary judgment as to the question of whether the insurer’s settlement of the claim against Thome without the other defendants’ consent breached the contract.

The firm had argued that the policy’s use of “your” in the consent-to-settlement provision required the consent of the named insured (in this case, Kinsey, the firm), as well as the settling individual insured.

In ruling on this argument, the court found that the policy’s use of the word “your” in the consent to settlement provision was ambiguous. Indeed, the court observed, the word “you” in and of itself can be “grammatically ambiguous even in every day usage.” It can be singular or plural, the court observed. The policy further “compounded” this “inherent ambiguity” by its inclusion of four different kinds of entities that the term could refer to. The insurer, the court observed, “could easily have drafted the contract to make clear that only the party to a settlement has the power to refuse consent. Instead, it chose to use a pronoun of inherently ambiguous grammatical number.”

The court noted policy concerns the insurer raised to the firm’s interpretation of the provision, noting that it was “hesitant to issue a ruling that might be read to give an employer absolute veto power over its insured employees’ ability to settle.” However, the court concluded that it was not required to make general pronouncements applicable to similar circumstances, observing that “the Court merely finds that this contract features ambiguous language concerning whose consent to settle must be sought.”

The court concluded that the insurer was “prohibited from approving the Thome Settlement without Kinsey’s consent,” and therefore that the insurer “breached the contract when it settled Mr. Thome’s case.”

Discussion

D&O insurance practitioners may be more familiar with the standard provision found in most D&O insurance policies requiring the insurer’s consent to settle. However, it is not uncommon for professional liability insurance policies (particularly those written on a duty to defend basis) to have policy provisions requiring the insured’s consent to settle. These insured consent provisions reflect concerns insured professionals may have about their professional reputation if the insurer were to settle a claimant’s allegations of underlying professional malfeasance or misfeasance.

The parties seemed to be aware of the insured’s consent to settlement provision at the time the Thome settlement was under consideration, but the parties apparently had  different understandings of what it meant. The insurer also operated on its understanding that under Illinois law it was permitted to pay the entire policy limit for a single insured, even if that would leave co-defendants without indemnification.

What caused the problems here are some basic problems with the English language. As the court pointed out, in common usage, the words “you” and “your” are “inherently ambiguous,” as they can be either singular or plural, and it is, as the Court observed, “often unclear whether a speaker intends to refer to one person or multiple persons.” This consent to settlement provision further compounded this ambiguity by specifying four different kinds of entities to whom the terms could refer.

Having found that the consent to settlement provision to be ambiguous, the Court, applying Illinois law, construed the provision against the insurer, observing that the insurer “could easily have drafted the contract to make clear that only the party to a settlement has the power to refuse consent.”

As a lifetime student of the law, I am an ardent believer in the power and importance of language, and in particular, the critical importance of individual words to express and convey meaning. But words can be slippery things; meaning is often dependent on context, and even intent. This court’s consideration of the language involved here is a sobering lesson for anyone called upon to draft policy language. Among the many problems that lie in wait to ambush even a cautious policy draftsperson are the hidden snares that the inherent ambiguities of language itself can create.

Another important lesson here is that insurers, like policyholders, can have contractual obligations that may apply in the course of claims administration. Insurance practitioners may be more familiar with such policyholder requirements as provision of notice, cooperation, and so on. This case is a reminder that under some policies, depending on how they are written, the insurer may also have duties in the course of the administration of claims, including even, as was the case here, the duty to obtain the policyholder’s consent to settlement.