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"Look, it was a bad mistake, and that's on me,"
CEO of LYFT Inc.

You may also have heard about the recent incident with LYFT. In the quarterly earnings report, LYFT originally stated that profit margins would increase by 500 basis points before correcting this to 50 basis points during the conference call. This clerical error caused the stock price to rise more than 60% in after-hours trading.

This situation is exactly what investor relations teams responsible for creating and reviewing presentation materials want to avoid at all costs. Although it was probably not due to a lack of control processes, the final document process will certainly be reviewed and improved following this incident. But it could have been much worse ...

Source: LYFT Inc. share price - google.com - as at: 16.02.2024

What does this mean for D&O insurance?

According to everything we know to date (16.02.2024), this is not an intentional criminal offense (crime insurance), but "negligent" fault. Therefore, the question of insurance cover focuses mainly on D&O insurance. In this context, financial loss legal protection insurance should also be mentioned, which - analogous to D&O insurance - would cover the costs of a defense in a civil law dispute for insured persons.

Now we come to D&O insurance. First of all, someone has to suffer a loss. In this case, the positive development of LYFT's share price certainly prevented worse consequences. Let us assume, however, that shareholders bought or bought additional shares on the basis of the earnings call and that the share price fell significantly after the earnings correction. In addition to the accusation of reputational damage (e.g. "loss of confidence due to an inadequate finance / investor relations department"), which would probably also have been made, these new shareholders would have suffered considerable damage as a result of the false report.

In this case, the (justified) claim for damages against the company is insured by Side C as liability cover for consequential obligations under capital market law, and the shareholders are compensated. Sidekick: You can find further secondary obligations under capital market law on our page "Being Public - the right insurance cover". If this component is missing from the D&O insurance or is poorly designed, the company must assume the compensation and then examine the liability of its executive bodies. Since in this case there is an admission of guilt by the CEO (note: this would not be recommended in a D&O claim without consultation with the insurer), the supervisory board must examine a breach of duty and compensation from the board members (e.g. organizational fault due to a lack of control by a representative of the finance department). In the case of slight negligence, liability then begins and the so-called Side A (core of the D&O insurance) would be addressed. It would clarify the liability issue and assume the indemnification up to the amount of the sum insured (note: we often see an insufficient sum insured in audits by our company) on behalf of the board members. If there is an indemnity for the board members and they cannot be held liable (unrealistic in this case), Side B would be affected. It would then compensate the company for the loss.

Furthermore, additional costs may arise, e.g. due to the demand for an investigation by supervisory authorities and/or shareholders to identify the cause. In this case too, the D&O insurance terms and conditions should be checked, as reimbursement of costs may be possible - depending on how good the terms and conditions are.

Conclusion: LYFT Inc. seems to have gotten off lightly due to the good share price performance and the presumed lack of damage. Nevertheless, it shows how quickly mistakes can lead to considerable damage and claims against board members that threaten their existence. If you are on the stock exchange, we are happy to offer our due diligence services. We run through liability scenarios based on specific cases (Risk Partners prospectus liability database) against your current insurance cover and uncover weaknesses - before uninsured claims are made against you as a board member.

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