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D&O Insurance and the COVID-19 pandemic – claims and considerations for underwriters

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By William Allison and Francesca Muscutt


Published 16 April 2020


At a time when pandemic-related D&O claims are already being filed in the US courts, should the D&O market in London be fearing Armageddon? This article takes a closer look at some of the claims which we expect to see during this turbulent and rapidly-evolving period and explores some considerations for D&O insurers.

Claims for lack of preparedness, poor contingency planning and general mismanagement

Businesses in the UK and across the globe have had to react swiftly as COVID-19 has taken its hold. Office closures, redundancies and furloughing the workforce, collapses in supply-chains, fall in consumer demand, travel restrictions, remote working, and enhanced pastoral support for staff are just some of the immediate issues that senior managers have had, and continue, to grapple with. 

How businesses have reacted will take centre stage in the coming months and years, and even the most well-planned crisis management policies will be put under the spotlight.  Allegations that businesses were ill-prepared to address virus-related operational risks, staff well-being, manage business disruption or deter cyberattack or data theft are expected to form the basis of many claims against companies and their directors. These claims may come from disgruntled shareholders, employees, suppliers, customers, regulators and possibly others.

But, of course, hindsight is a wonderful thing. When questions are being raised about  the UK government’s own possible mismanagement of the crisis, many will argue that directors and senior managers could not have foreseen the seismic impact that the COVID-19 pandemic would have on their business, or have reasonably done more to protect themselves or those impacted.  Had senior managers invested significant management time and resources in robust contingency planning for remote, once in a lifetime events such as this, then no doubt, they would have been criticised for taking an over-precautious approach and wasting business resources.

And so for this reason, while third party claims against companies and their senior managers can be expected, it seems unlikely that claims based on lack of preparedness, poor contingency planning or general mismanagement will succeed.  D&O insurers may still however have to pay the (potentially significant) costs of defending these unmeritorious claims. 

Securities Claims

In the US, securities class actions have been filed against corporations and their senior management in relation to COVID-19. It is alleged by investors that Norwegian Cruise Line Holdings Ltd misled customers with unproven or false statements about COVID-19, enticing them to purchase cruises and that Inovio Pharmaceuticals made false and misleading statements about a vaccination for COVID-19 that it was producing.  In both actions, it is alleged that the value of company’s shares fell significantly following disclosures about the true positions.     

A class action has also been commenced by investors against the communication platform, Zoom, accusing the company and its senior managers of concealing shortcomings in the App’s software encryption, negatively impacting its share price.  Details are still emerging but the allegations appear to suggest that Zoom take up (and therefore its share price) would have been far stronger during the pandemic but for this concealment.

It is too early to say whether similar claims will be brought in the UK (pursuant to sections 90/90A Financial Services and Markets Act 2000).  Recent years have not seen the wave of securities class actions being brought in the UK that some previously predicted, and we do not expect a sudden sea change now.  However, it is inevitable that companies will be desperate to reassure investors and prospective shareholders that they are bouncing back (or have bounced back) from this pandemic and that their financial position is strong.  Companies and their senior managers will need to take extra care when making future public disclosures to ensure nothing they say is false or misleading.

With so many corporations failing and/or suffering from sharp share price falls, the Claimant law firms in the UK will no doubt try to rally investors to support claims against companies and their management.  As such, we are likely to see a spike in the number of investor claims in the UK, even if the vast majority are unmeritorious and ultimately are likely to fail.

Distressed Businesses

This pandemic comes at a time when many businesses were already struggling and it is, therefore, likely we will see a sharp increase in insolvencies and personal bankruptcies in the UK and worldwide.

The UK’s Business Secretary declared in March this year that the government will suspend director liability for wrongful trading (trading where a director knows or ought to know that insolvency is unavoidable) and will introduce a moratorium for businesses undergoing a restructuring process. These measures, still to come into force under the Coronavirus Act 2020, aim to assist companies to trade through financial distress caused by the pandemic, without the risk of personal liability for directors. 

The proposed measures do not distinguish between businesses that were struggling before the pandemic and those whose financial performance has been affected only by the pandemic, and this could make the decision of when to cease business and enter insolvency more difficult for directors. New measures aside, directors will remain under an obligation to comply with their fiduciary and Companies Act duties, and they may face personal exposure, the risk of sanction and possible disqualification for misconduct, if they fail to do so.

D&O Insurance

D&O policies are intended to protect a company’s board of directors and senior officers against claims, investigations and associated defence costs relating to their decisions and actions in the course of managing the company.  Many COVID-19- related claims are expected to fall within the insuring clause of the policy, subject to its terms and limitations. 

Business interruption claims, which are predicted to make up the vast majority of pandemic-related losses, are not covered by D&O policies.  Also other policies, in particular cyber insurance, general liability or environmental policies may be available to meet third claims and need to be considered.

Losses arising from the pandemic are expected to have a long tail and may impact more than one policy year.  Underwriters renewing policies will need to investigate how businesses managed the crisis operationally; its impact on the financial viability of the business now and going forwards; and how well the business is prepared for any future crisis.  Underwriters will need to consider policy wordings carefully and the need for specific exclusions for COVID-19-related (or more generally “virus-related”) losses.