A group of investors in Dow Inc. filed a lawsuit in late August accusing the chemical giant of failing to adequately disclose the impact of tariffs on its business. This marks the first investor class action tied to the trade tariffs imposed by former U.S. President Donald Trump, which disrupted global trade, forced companies to reassess entire supply chains, and led to widespread profit warnings across various sectors. It is unlikely to be the last.
As the full effects of tariffs start to manifest in corporate results and share prices, more investors may claim they were misled by overly optimistic statements made by companies. This exposure to potential litigation is prompting firms to seek protection through Directors and Officers (D&O) liability insurance.
“I view the Dow case as an example of plaintiffs’ lawyers seizing on a stock price decline and working backward to claim that generalized statements were somehow misleading because they did not predict the future,” said Edmund Polubinski, a partner at the law firm Davis Polk & Wardwell.
Securities class actions often reflect prevailing themes in the financial markets. During the Covid-19 pandemic, numerous lawsuits were filed against companies accused of downplaying the impact of declining demand during lockdowns. More recently, lawyers have observed a rise in filings related to cryptocurrency and artificial intelligence, with some companies being sued for “AI-washing,” or misrepresenting their capabilities in the AI space.
As the ongoing shift in trade tariffs and deals continues, the risk of litigation is on the rise.
For companies, the impact of tariffs extends beyond the levies themselves. An uncertain trade environment can delay investments, undermine consumer confidence, and hurt visibility. This puts firms at greater risk of investors noticing discrepancies between optimistic outlooks and actual performance.
“Plaintiff’s counsel are well-versed in – and I’m being a little facetious here – taking advantage of these types of market disruptions and finding a hook to allege that a company did something wrong in the way that they managed it or communicated about it,” Kelly Thoerig, product leader in the Professional & Executive Risk division at insurance broker Lockton Inc., explained in an interview. This evolving landscape is creating new opportunities in the insurance market.
Wayne Imrie, head of London Market Wholesale Executive Risks at Beazley Plc, has noted a surge in interest for D&O insurance coverage. “In this current environment, you’re probably seeing demand at its highest level because there is so much uncertainty,” he said, referring to insurance coverage for directors and officers.
For companies facing tariff-related allegations, D&O insurance is typically the first line of defence. This type of liability coverage protects directors, officers, and senior managers from personal financial losses and legal costs arising from accusations of “wrongful acts” during their tenure.
While D&O coverage protecting the company itself is less in demand, this could change in light of the new risks. “It’s rarely purchased, although let’s see whether we see renewed interest in that form of coverage given these new risks,” Thoerig added. “I suspect that may change.”
Insurers, alongside companies and shareholders, will play a key role in this emerging trend.
“What we are very keen to understand is, what are our clients telling the Street, and how open and transparent are they being?” Imrie said. “And then, do the ongoing financial reports back up what was said? Because if not, that’s when investors will be upset. They don’t like surprises.”
In Dow’s case, investors allege that the company blamed tariffs for disappointing second-quarter results and a dividend reduction, despite previously asserting that it was well-positioned to weather the impact of the tariffs and continue to deliver shareholder returns. Plaintiffs are now seeking damages after the company’s share price slumped in response to the results.
“The plaintiffs’ bar will surely continue to try to capitalise on stock price declines by bringing securities cases,” Polubinski remarked. “Unfortunately, any company with exposure to tariffs will face the threat of cases like this.”
Plaintiffs’ lawyers are likely to scrutinise the disclosure statements made by companies, particularly any overly optimistic comments about the effects of tariffs, the ability to source materials from low-tariff jurisdictions, or the lack of detailed disclosures.
“Although my crystal ball is no better than anyone else’s, I do think we will see more tariff-related securities class action lawsuits,” said Kevin M. LaCroix, attorney and executive vice president of insurance intermediary RT ProExec.