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D&O Professionals Series: Tyler Gerking discusses D&O coverage and litigation

Financial, Executive and Professional Risks (FINEX)
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By John M. Orr | August 20, 2020

Farella Braun + Martel LLP Partner Tyler Gerking explores current trends and observations on D&O coverage and litigation.

Willis Towers Watson’s Financial, Executive & Professional Risk Practice (FINEX) collaborates with professionals throughout the Directors & Officers Liability (D&O) insurance industry to gain perspective into the many facets of our business. In our “D&O Professionals Series,” we feature professionals from various corners of the industry, including securities litigation defense attorneys, insurance company underwriters and claims professionals, and insurer and policyholder coverage counsel. Our objective is to discuss how changes in the broader economy and changes in business culture as a result of the COVID-19 outbreak and other macro-economic factors have impacted securities litigation and, more broadly, our industry.

In this edition, we feature Tyler Gerking of Farella Braun + Martel LLP, Partner and Chair of the firm’s Insurance Recovery Group. Farella is based in San Francisco and represents policyholder clients throughout the West and nationally.

Has the economic downturn had a material impact on D&O litigation against private companies and their directors and officers?

Yes. We’ve seen an uptick in the types of disputes that can implicate D&O liability policies. And the disputes we’re seeing more frequently involve insolvency and bankruptcy issues that can impact how cases are litigated and settled. This can sometimes raise practical and coverage issues under the D&O policies, and these issues can impair the companies’ ability to defend and resolve the litigation. One example, which we’ve seen now multiple times, is a settlement discussion that stalls because the policyholder’s D&O policy limits are insufficient to cover the full amount of a plaintiff’s reasonable settlement demand. In normal times, the insurer would pay its limit and the policyholder would contribute the remainder to end the case. Now, the policyholder is unable to do so because of its financial distress. This prolongs the litigation and, in turn, requires the insurer to pay additional defense costs that further erode the policy limit, making resolution even more difficult. A similar, but slightly different, scenario is playing out in several other cases we’re handling. A key motion needs to be decided by the court to set up a favorable settlement dynamic, but courts are either not ruling on motions or postponing hearings for months. In the meantime, discovery is allowed to proceed, again eroding the policy limit, which is now the only source of funds available to resolve the case because of the policyholder’s financial distress. This is hurting not just the policyholder, but also the insurer and the underlying claimant.

Have you seen a noticeable increase in litigation involving COVID-19-related issues, such as director and officer oversight over health and safety protocols, return to work policies, or similar issues?

We have not seen many claims arising out of these issues yet, but people in many industries are concerned about them. Our firm has had many inquiries about how to structure COVID-19 health and safety protocols and policies, both to protect employees / customers and to mitigate risks. We’ve also been advising clients about how to structure indemnification and insurance programs to reduce liability exposure.

Without identifying insureds or insurers by name, have you experienced changes in the claims handling behavior since the outbreak and downturn began?

Yes, we’ve perceived some more aggressive assertions of coverage limitations by insurers, though it’s hard to tell whether any particular instance is due to COVID-19 or the current economic uncertainty. We’ve seen D&O insurers deny coverage for claims where, based on our prior experience, we had expected only a reservation of rights. I have several matters right now in which insurers have surprised us by denying coverage based on “prior knowledge” exclusions that seem not to be applicable. In several others, insurers are investigating claims more aggressively and for longer periods of time before agreeing to defend.

From your vantage point, what do you envision the D&O litigation environment looking like in the next year to 18 months?

We expect claims to increase simply because the economic uncertainty and challenges can lead to more disagreements and more aggressive positions being taken. We also expect that, from a practical standpoint, insolvency and bankruptcy issues will play an increasing role in how claims are dealt with and resolved. And we assume that event-driven derivative actions will continue to raise challenging liability and coverage issues.

As a policyholder coverage attorney, describe some of the challenges with client D&O renewals, particularly as to breadth of coverage, whether in seeking expansions to coverage or mitigating newer restrictions.

We’ve seen a hardening of the market, which had already begun before the COVID-19 pandemic hit. We are noticing that some underwriters have less flexibility or willingness to negotiate broader terms as they try to narrow the insurers’ exposure. In several instances, we’ve seen underwriters take more extreme steps, such as attempting to add exclusions that eliminate coverage for claims “arising from or relating to” the insured company’s insolvency or bankruptcy. We’ve been able to avoid restrictions like this so far, but they have caused a lot of concern at the board level.

What else would you like us to know about how changes in the broader economy, changes in business culture as a result of the pandemic, have impacted our industry and relationships among policyholders, defense counsel, insurers, and brokers?

First, we’ve been surprised at how resilient our sector of the economy has been throughout this crisis, as everyone moved out of their offices and onto the internet full time. Despite this huge disruption, pretty much everyone it seems (our clients, defense counsel, insurers, insurers’ counsel, brokers, mediators, arbitrators and judges) have found ways not just to keep moving forward, but do so quickly. If anything, the pace of our work has increased when you might have expected it to slow down. It’s actually been really impressive! Second, we’re hoping that this pragmatism translates into more efficient, practical solutions for our clients, and we’re gratefully already seeing some of that.

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates. COVID-19 is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information.

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D&O Liability Coverage Leader, FINEX

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