GameStop stock mania could worsen social inflation

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GameStop stock mania could worsen social inflation

Recent Robinhood lawsuits will likely add to insurers’ rising claims costs, says a new AM Best commentary.

Robinhood removed GameStop and other companies from its trading platform in January amidst an “unprecedented stock rise” following an organized campaign on Reddit to target the shares.

Recent stock market volatility caused by the frenzied trading of GameStop, AMC Theatres and other shares could spur a wave of shareholder ligation and worsen social inflation, according to AM Best.

Frustrated investors have already filed class-action lawsuits against Robinhood after it restricted trading of the stocks made popular on the WallStreetBets Reddit forum, allegedly to help Citadel Securities, one of the brokerage’s largest investors. AM Best expects many more lawsuits will soon follow.

“Disclosures provided by Robinhood will be under intense scrutiny by lawyers, and although it may be a while before the courts decide, insurers providing coverage for Robinhood could still face steep defense and containment costs (DCC),” the credit rating agency said in its latest Best’s Commentary.

Some D&O policies may cover expenses related to government investigations if company directors are the center of probes, said AM Best.

This is not the first time Robinhood has been on the government’s radar. In December 2020, the company agreed to pay $65 million to settle claims that it was selling transaction data without disclosing the practice to customers following a Securities and Exchange Commission (SEC) review.

As the current Robinhood lawsuits move through the courts, rising DDC costs and juries’ increasing propensity to deliver large awards will add to the mounting pressures facing D&O and professional liability insurers.

“Headline news such as Robinhood and the involvement of hedge funds, along with the accelerated pace of communication and engagement in social media, will likely worsen social inflation significantly — something insurers will have to monitor closely over the medium term,” AM Best noted.

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