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Considerations for D&O liability insurance during Covid-19

Financial, Executive and Professional Risks (FINEX)
COVID 19 Coronavirus

By Namit Mahajan and Parimalam Raman | April 17, 2020

As health authorities work to contain the spread of COVID-19 and organisations bolster resilience plans, there is a general anticipation that claims against Directors and Officers are likely to rise.

Directors & Officers (D&O) insurance has experienced significant increased risk exposure in recent years.

Whether it is disclosure obligations for potential impact of COVID-19 on businesses or increasing cyber vulnerabilities due to massive work-from-home initiatives or workforce and operational adjustments, these bring new potentially unanticipated risks around Employment Practices Liability. Directors and Officers are dealing with myriad of risks with no real precedent for many of today’s tough decisions.

Do COVID-19 D&O claims fall within policy insuring agreements?

As the risks for Directors and Officers increased in recent years, the policy wordings have also evolved. Insuring clauses in both public company and private company D&O policies typically have broad triggers. The coverages are segregated into three distinct insuring sections: coverage for non-indemnified D&O loss (Side A), indemnified D&O loss (Side B), and organisational loss, or “entity coverage” (Side C). 

All three sections customarily cover “loss” resulting from “claims” against an “insured” “for a wrongful act. Applying the traditional definitions of these terms, the foreseeable COVID-19 D&O claim would fall within the insuring agreements, thus being potentially covered and subject to the policy’s remaining terms and limitations. Importantly, entity coverage would not be available to a public company for negligence-based claims that are unrelated to either the purchase or sale of company securities or to Employment Practices Liability (EPL) claims (It is common to see Entity EPL coverage in Asia under D&O).  As an example, a COVID-19-related securities claim may involve a shareholder class action alleging violations of securities laws relating to the adequacy of COVID-19 risk disclosures. 

The policy may also extend to cover costs associated with certain government investigations and inquiries. Wording varies from company to company and product to product.

Rightfully, D&O wording is not likely to speak to specific risks associated with COVID-19. Nevertheless, most policies will respond well to traditional D&O perils, even those triggered by COVID-19 events. This “silent COVID-19” coverage is “silent” because it does not expressly address pandemic perils, but it may nevertheless respond to them.

Beware of coverage limitations potentially being applied in unexpected ways

  • Bodily injury exclusion: Generally, there are two types of bodily injury exclusions. The first excludes losses “for” bodily injury, sickness, disease and so on, i.e., direct losses, such as medical expenses. To the extent a COVID-19 claim seeks damages for indirect financial losses, we do not anticipate the exclusion to be a coverage impediment. However, a broader variation of the exclusion, precludes coverage for claims “based upon, arising out of” a bodily injury. 
  • Pollution exclusion: Pollution exclusions preclude coverage for claims “for” or, alternatively, “based upon, arising out of,” the release or dispersal of pollutants, including specified contaminants, some of which may have a bearing on COVID-19 claims. Examples may include “germs,” “viruses,” and “biological irritants”.
  • Conduct exclusion: The exclusion for intentional/deliberate acts may trigger upon a final, non-appealable adjudication of such conduct. In light of the high hurdles of intentionality and adjudication, we would not envision the exclusion to apply in most COVID-19 cases.
  • Professional services (E&O) exclusion: Similar to a bodily injury exclusion, should an E&O exclusion appear in a policy, it is likely to exclude loss “for” or “based upon, arising out of” acts or omissions in the rendering or failure to render professional services. The “based upon” wording may have more impact in COVID-19 cases for companies in affected industries, such as healthcare and life sciences. A suitable carve back for ‘Failure to supervise’ is important from coverage perspective.
  • Other insurance: Should claims trigger coverage under the D&O policy, they may also implicate additional coverage lines, such as general liability or environmental. How each policy responds, whether as primary, excess, or via a shared arrangement, will depend on the specifics of the claim and the additional policies’ respective other insurance wordings.

Bankruptcy considerations and D&O coverage

With a potential global recession on the horizon, cascading bankruptcies could well disrupt whole industries or economies. Previously well-performing businesses may find themselves confronted with mandated closures, seemingly insurmountable workforce challenges, and cash management concerns.

Meanwhile, the advancement and indemnification protections executives typically rely on to protect themselves may not be available when they need them most. D&O coverage may be the only protection they can count on. As expense pressures grow, D&O coverage is not a place to look to cut costs. It has never been more important.

With this in mind, companies should turn their attention to policy provisions that have the potential to come into play in these situations.

  • Side A: Coverage for non-indemnifiable D&O losses could be impacted to the extent bankruptcy law restrictions may curtail the company’s ability to advance or indemnify losses. Side A is a critical, last-line-of-defense coverage that should be a part of every enterprise’s D&O risk management plan. It should be considered a D&O coverage tool that can yield dramatically different results depending on strategic choices relative to breadth and levels of coverage, form choices, coverage enhancements, and program structure.
  • Bankruptcy waiver: A bankruptcy clause may comfort directors and officers by specifying that (1) a bankruptcy filing will not relieve the insurer of its coverage obligations, (2) the policy is intended to benefit individual insureds as a matter of priority, and (3) the parties will not to oppose or object to efforts by the insurer or insureds to obtain relief from the automatic stay to pay claims.
  • Order of payments: An order of payments provision provides that the insurer will prioritize claim payments under Side A before paying losses under Side B or C. In some cases, the clause may authorise the organisation to advise the insurer to delay payments under Sides B and C in favor of future Side A payments.
  • Entity vs. Insured/Insured vs. Insured exclusion: In the context of bankruptcy, claims may be asserted against directors and officers by trustees, receivers, and other bankruptcy constituencies. To mitigate against application of the exclusion, companies should seek to exempt such claims from the exclusion.

Emerging underwriting considerations

It is too early to predict how insurers will change (if at all) their underwriting views to pandemics. The situation is fast changing, but our recent experience suggests:

  • Insurers are not pushing for any specific pandemic (related) exclusions in Asia except in situations where it comes as a part of broader Treaty renewals
  • There is increased scrutiny around business impact of COVID-19 and related public disclosures. Some of the key issues where Insurers would expect detailed responses are:
    1. Any guidance provided or planned regarding the impact of COVID-19 on financial performance?
    2. What additional disclosure is being planned as a result of the ongoing pandemic?
    3. What are the medium-term operational impact of COVID-19 pandemic?
    4. What are the actions taken to address such impact to the business ensuring the safety of all employees?

Conclusion

We are in fluid and changing times. Companies should engage their brokers on COVID-19 D&O risk more deeply and scrutinise coverage terms going forward. We encourage companies to begin renewal protocols early, and to advise their brokers of anticipated changes in exposures, such as M&A transactions and bankruptcy filings. The challenging market conditions are likely to continue or become more challenging very quickly. Although coverage may also be more expensive, with the heightened risk this environment presents, it may be far more valuable today than it ever was.

Authors


Claims Leader – Singapore, Corporate Risk & Broking

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