May 20, 2020

Anticipating director's and officer's liability claims amid a pandemic

Article by Deanne Wood

Partner

Bell Dewar Inc.

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With the anticipated phased-in reopening of the economy, one of the biggest challenges for companies (and the insurers who indemnify them) will be managing the ever-evolving COVID-19-related disclosure responsibilities.

Two Covid-19 related actions against management triggering D&O claims have already received significant attention abroad.  The first is a shareholder action against Norwegian Cruise Line Holdings Ltd (Douglas v. Norwegian Cruise Lines) alleging the company covered up the extent of the outbreak to protect bookings. The second, also a shareholder action, is against Inovio Pharmaceuticals Inc (McDermid v. InovioPharm, Inc), and its directors relating to a press release concerning the development of a Covid-19 vaccine. In the coming weeks and months it is likely that there will be an increase in claims of this nature as businesses reopen and begin to grapple with the challenges of operating under new restrictive environments with dramatic decreases in revenue, operations and finances.

There is little doubt that COVID-19 has wreaked havoc on almost all businesses across the country. Companies will be desperate to show optimism and to demonstrate that it is business as usual. Regrettably a number of companies will fail or go insolvent. In the wake of this unparalleled market disruption it is very likely that there will be an increase in shareholder dissatisfaction as company values fall and dividends are suspended. Moreover, as the economy starts to reopen, companies will begin to make statements about their business operations, supply chains, customer interactions, workforce, cash flow and reserves, ability to provide a service or to meet a target and so forth.

Boards of directors should prepare for the anticipated increase in COVID-19-related lawsuits. The way in which companies navigate the reopening of their businesses, and the way in which they conduct themselves thereafter, may well open the door for D&O claims. This will lead to a renewed focus on the scope of D&O policies and the protection they provide.

No doubt insurance underwriters are carefully watching these unfolding developments and are all too aware of the rising potential that the current circumstances present for a dramatic increase in insurance claims. Some of the notable increases in risk that have been brought about as a result of the virus outbreak include –

  • Failure to use appropriate technology in order to mitigate loss;
  • Failure to arrange alternative supply chain lines in circumstances where the regular supply chain cannot be accessed;
  • Failure to deal with cyber-attacks given the increase in work-from-home employees;
  • Failure to provide adequate customer support;
  • Conclusion of contracts that will be impossible to fulfil;
  • Incorrect statements made regarding the controls in place to ensure prevention of the spread of the virus;
  • Misstatements regarding the solvency status of the company;
  • Failure to provide adequate sanitation and hygiene to employees who must be physically present at the business premises;
  • Unfair dismissal of employees who are retrenched. 

The timing of notice given to insurers will also be a key feature in the assessment of claims as companies must give immediate notice of a lawsuit or regulatory inquiry under an insurance policy that could potentially provide D&O cover. Companies with policies up for renewal may rush to provide notice under existing policy terms.

The reason for this  is  there can be little doubt that new policies (to the extent that they are even offered in the current market) or policies that are up for renewal will be underwritten with specific provisions in place designed to exclude the impact of the pandemic. Policy terms may be structured with significant reductions in coverage containing explicit exclusions for lockdown and coronavirus related claims.

Insolvency exclusions are also likely to become prevalent. There may also be significant changes to the cover limits offered by insurers, particularly for businesses that will be highlighted as having significant risks of surviving the pandemic.

We recommend that insurers review existing D&O policies to assess terms that may affect coverage for COVID-19-related claims. Please contact our insurance team with any D&O related inquiries.

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