COVID-19’s impact on the economy and business operations continues to deepen. Many companies may be asked additional questions by their insurance underwriters, and increased Directors & Officers (D&O) litigation relating to the outbreak is expected. Claims could be filed alleging that D&Os were negligent in their actions or inactions related to COVID-19. In fact, the first lawsuits were filed in March, both securities class action suits – one against a pharmaceutical company and one against a cruise line.
With the virus evolving so rapidly, it is difficult for companies to predict its impact to operations and finances. Governmental actions, as well as the unknown duration of the pandemic, could also significantly change the effect.
Potential claims include:
- Inaccurate disclosures of the impact COVID-19 is having on the company
- Disruptions in operations affecting vendors, suppliers and customers
- Slander of an individual due to national origin related to COVID-19
- Unauthorized disclosure of an employee’s medical condition in relation to the virus
- Improper network protection, leaving the business exposed to cyber risk
- Company share price drops due to mismanagement of response to COVID-19
- Insider trading, resulting from stock drops
- Increased risk of exposure to employment-related claims
With so many unknowns, the success of litigation will likely depend on whether a company makes accurate disclosures and if it has disruption plans in place with alternative supply chain options. Although it may be hard to prove damages caused by COVID-19 were due to corporate or individual mismanagement, a claim may still result in a settlement.
There is no standard D&O policy; coverage terms, conditions and exclusions vary within the D&O market. Businesses should review the terms and conditions of their policy to determine how their coverage might respond to any allegations made for actions taken regarding COVID-19.
D&O policies typically exclude coverage for claims for bodily injury or sickness. Generally, the exclusion applies to “bodily injury, violation of any right of privacy, mental anguish, humiliation, emotional distress, sickness, disease or death of any person or damage to or destruction of any tangible property, including loss of use thereof, whether or not it is damaged or destroyed.”
Public companies should make sure that if their D&O policy has a bodily injury exclusion it doesn’t apply to securities claims. They will also want to narrow the bodily injury exclusion as much as possible and ensure that the policy doesn’t limit coverage.
The conduct exclusion (dishonest, fraudulent, malicious, and criminal acts) should also be reviewed for application requirements.
Finally, companies may want to purchase Side-A DIC (difference in condition) of a D&O policy to best protect individual directors and officers in shareholder actions. This provides added protection beyond corporate indemnification if the company becomes insolvent.
D&O policies are designed to respond to claims of wrongful acts that result in financial loss. Although what constitutes as a wrongful act in connection with COVID-19 is unclear.
Due to a market already dealing with event-driven D&O claims (#MeToo, opioids, cyber) resulting in rising rates, the additional changes driven by COVID-19 is expected to further result in rate increases. Be prepared to answer specific questions by insurance underwriters during the renewal process:
- Has COVID-19 had an effect on your current operating results or financial condition? Do you expect future periods to have a similar or different effect?
- How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook?
- How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets?
- Do you expect any material impairments, increases in allowances for credit losses, restructuring charges, other expenses or changes in accounting judgments?
- How has COVID-19, including remote working, affected your operations, including internal controls over financial reporting?
- Have you experienced challenges in implementing business continuity plans or do you foresee requiring material expenditures to do so?
- Is the company anticipating a reduction in workforce? If so, is the company anticipating employees to be terminated or furloughed? Has the company formulated criteria in determining which employees to select for termination or furlough? Will outside counsel be used? Will consent forms be required?
Your insurance broker can help you prepare now for your renewal. To put you in the best position for your renewal, inform your insurance broker of:
- Reduction in headcount – temporary or permanent
- Location closures and related impact to business operations and financials
- Travel restrictions that impact the business
- Supply chain impacts and back-up options, including inventory and ability to meet demand
- Reduction in fleet and equipment use
- Delays or terminations to planned merger and acquisition activities or financing
- Reduced revenue, including changes to corporate guidance (business expectation predictions provided for investors to evaluate the company's earnings potential)
Corporate directors and officers must continue to manage the rapidly evolving challenges associated with COVID-19. Those who carefully consider how the pandemic may increase its exposures will be best prepared to plan for the future.
If you have any questions, please contact us.
Looking for more COVID-19 resources? Visit our resource center for expertise on impacts to expect and how your business can respond.
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