Directors & Officers Liability Issues and the Coronavirus: Is That a “Thing”?

Farella Braun + Martel LLP
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Farella Braun + Martel LLP

Over the last few weeks we have seen a number of informative articles discussing the crucial issue of coverage for business interruption claims arising out of government shutdowns of businesses to inhibit the spread of COVID-19, here. As the economic disruption from these efforts continues, however, we are likely to see impacts in the Directors & Officers Liability market – not only from claims that trigger D&O policies, but also additional challenges in placements and renewals of D&O programs.

Insurance Placement

To state the obvious, the D&O market was extremely tough even before the financial markets took a tumble this year. Premiums and retentions were up—sometimes by multiples—and some sectors had difficulty purchasing adequate coverage at any price. In placing or renewing coverage, both private and public D&O insurers may even more carefully scrutinize certain sectors, as well as their insureds’ current financials and future prospects. And on the other hand, independent directors may demand greater D&O protection as a condition of service on the board of a company whose operations are potentially impacted by the pandemic.

Companies should take particular care to provide accurate responses to questions posed or information requested by the insureds in the placement process. Otherwise, they might be vulnerable to a rescission defense if the information is later determined to be materially false. Companies should also review their program structure to ensure that independents directors are protected by stand-alone Side A coverage in the event of a covered loss that cannot be indemnified by the company. Such losses include insolvency events and derivative actions, both of which may become more frequent in the coming months.

Insurers may add exclusions to limit their exposure to COVID-19-related risks, particularly in vulnerable sectors. Such exclusions could include broader bodily injury exclusions or even exclusions for any losses arising from the financial impact of a pandemic.

Claims

As of the date of this post, two securities class actions have been filed against companies that allegedly made false disclosures relating to COVID-19 events: a cruise line company that allegedly failed to fully disclose the effects of the virus on its business, and a pharma company that allegedly made a false claim that it had developed a COVID-19 vaccine.

We may see similar disclosure suits as the stock market remains in flux and companies struggle to accurately assess and disclose the impact of the virus and the government response on their financial health. We may also see “event-driven” derivative claims as the plaintiffs’ bar develops new theories of liability against directors and officers for failing to manage their response to the virus, supply chain risks or privacy breaches. Officers and directors may be more vulnerable to insider trading claims as stock prices fall. If companies do not survive the crisis, shareholders and creditors may pursue such claims in bankruptcy courts, with the directors and officers (and ultimately, their insurance) as the only remaining viable targets.

Generally, these securities and derivative claims should not present unique coverage issues beyond those normally raised by insurers in response to securities or derivative litigation actions. Some policyholders may be surprised, however, when their insurer raises the “bodily injury” or “personal injury” (privacy) exclusion as a defense to coverage. If this happens, policyholders may learn to their chagrin that the exclusion in their policy does not meet market standards. Such an exclusion should include a carve-back exception for securities claims arising out of bodily injury or personal injury risks. It also should be limited to exclude only claims “for” bodily injury or personal injury, as opposed to the broader “arising out of or related to” those risks. Even if the broader exclusion is used, coverage counsel still should be able to develop arguments to eliminate or limit the impact of that exclusion.

People and businesses face many risks and uncertainties in the coming months. D&O insurance exists to mitigate and protect against the risks and uncertainties of impacts on a company’s financial health, whatever the source. Companies and their directors and officers should expect no less of their D&O insurers if the financial impact of COVID-19 or a related government action leads to a shareholder or derivative claim.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

© Farella Braun + Martel LLP

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