REIT Insurance Experts Reflect on Risk Management

Michael Chu, vice president and national practice leader for REITs at Arch Insurance Group, and Howard Sider, underwriting manager at Arch Insurance, joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Chu noted that 2016 was a record year for securities class action litigation, which rose 44 percent mostly due to mergers and acquisitions (M&A) claims. With regard to REITs, M&A cases continue to be filed, but for the most part they have stayed in state court, especially Maryland, he added.

Maryland and other jurisdictions, for the most part, have not followed Delaware’s lead in rejecting disclosure-only settlements, so plaintiffs see no need to change venue, according to Chu.

Chu also pointed out that the six non-M&A class action cases against publicly traded Equity REITs in 2016 marks the highest number in any year since the financial crisis.

Meanwhile, Sider commented on the increased activity that REITs have experienced in the area of derivative demand letters.  More recently, these letters have been primarily focused on executive compensation and typically settle with a substantial plaintiff fee award, he noted.

Sider said there has also been an uptick in regulatory investigations of REITs, primarily focused on accounting irregularities or improprieties, disclosure issues and use of non-GAAP metrics. Since 2013, there has been a 130 percent increase in Securities and Exchange Commission actions against REITs, and about a quarter of those were focused on reporting and disclosure matters, according to Sider.

Sider added that all of these actions are resulting in increased scrutiny of companies by the media, shareholders and analysts, which can lead to subsequent litigation.