D&O liability insurance was already undergoing a market correction before the pandemic, after years of poor results and growth in claims. The uncertainties that COVID-19 is bringing to all sectors of the economy will undoubtedly lead to further changes – not only in the form of higher rates, but also tighter terms and conditions, as well as additional exclusions.

These trends will make navigating a complex line of coverage even more challenging, but they are not unprecedented. D&O insurers similarly tightened their underwriting during the financial crisis in 2008, then eased coverage restrictions after the global recession ended.

Times of crisis historically make directors and officers more frequent targets of litigation, as plaintiffs scrutinize organizations’ decisions. Generally, D&O allegations tend to fall into three categories: disclosures, particularly for public companies; mismanagement, especially when companies post results or their share prices drop precipitously; and insolvency. Even when a lawsuit is found to have no merit, organizations still must defend it, and those expenses can quickly mount.

D&O LAWSUITS OVER COVID-19

The Securities and Exchange Commission has encouraged public companies to disclose the impact of the coronavirus on their operations and financial condition, even as the SEC notes the future impact is uncertain. But public statements can get companies into hot water, as recent litigation shows.

Several lawsuits naming organizations and their directors and officers have already been filed with allegations relating directly to the coronavirus pandemic.¹ A sampling of lawsuits include class actions against:

• Norwegian Cruise Line Holdings Ltd. In March, plaintiffs filed a federal securities lawsuit alleging, among other things, that the cruise line made false and misleading statements about the impact of COVID-19 on the company’s operations and business prospects. The lawsuit also cited media reports of leaked internal memos directing the cruise line’s sales staff to lie about the coronavirus.²
• Inovio Pharmaceuticals Inc. Also in March, plaintiffs filed a securities lawsuit alleging the biotechnology company made false and misleading statements that it had designed a vaccine for COVID-19 in three hours. A research firm called on the Securities and Exchange Commission to investigate Inovio’s statement, suggesting it was “ludicrous and dangerous.”³

INSURANCE MARKET REACTIONS

Conditions in the D&O marketplace began hardening early in 2019, as litigation rose, losses outpaced premium growth and insurers responded to years of financial pressure. Underwriters’ reactions to higher losses in any line of business can take the form of higher rates, tighter terms and conditions, or reduced coverage. Depending on circumstances, underwriters might exercise all of those options on a given account.⁶

With the coronavirus, CRC Group is observing several different actions in the D&O marketplace, including:

• Insurers withdrawing quotes. Pulling quotes off the table is a sign that insurers are uncomfortable with the level of risk.
• Exclusions added after quoting and before binding. This is highly unusual, and it signals that insurers are worried about profitability. Bankruptcy exclusions are likely additions.
• Pandemic-specific exclusions. Most professional liability lines, including D&O and employment practices liability, exclude coverage for claims involving bodily injury. During the COVID-19 pandemic, the overwhelming majority of liability claims will surround consequential loss.

CRC Group has not yet seen any market exits or significant reductions in capacity for D&O risks at this time. We anticipate that the D&O marketplace will harden further as the impacts of the coronavirus become clearer.

WAYS TO MITIGATE D&O EXPOSURE

Stay informed. Directors and officers need to ensure they receive timely and accurate information regarding their organization’s operations and financial activities. Management decisions based on faulty information could prove to be costly and prompt lawsuits alleging false and misleading statements.

Be cautious about public statements. More than 150 companies have so far announced disruptions of their supply chains and many have indicated they will report lower revenues as a result of the pandemic. Any public statements by an organization’s executive leadership regarding the impact of the coronavirus should be based on facts. Understating the impact of COVID-19 on revenues, supply chains and so on could come back to haunt the organization’s directors and officers.⁷

Seek expert advice. D&O risks are complex, and they require expertise in law, insurance and business to manage properly.

Maintain D&O liability insurance. D&O coverage generally is available in three forms: Side A, which provides protection when an organization cannot indemnify its individual directors and officers; Side B, which reimburses organizations when they indemnify directors and officers; and Side C, which covers the entity when the organization and individual directors and officers are named as co-defendants. While the vast majority of public companies already purchase Side A difference-in-conditions (DIC) excess coverage, it is now more critical than ever for private and non-profit entities to add this valuable product to their current D&O programs. The Side A DIC product maximizes person protection of directors and officers for claims that are not indemnified. As COVID-19 slows economic growth and forces businesses to make difficult financial decisions, the value of Side A DIC coverage will increase considerably.

Click here to learn more about Side A DIC coverage.

WHAT RETAIL AGENTS CAN DO

Retail insurance agents are important advisers for the businesses they serve. Some things retail agents should do with their insureds during the pandemic are:

• Discuss business needs and how insureds are responding to COVID-19. Understanding an organization’s business and its exposure to D&O claims is a critical conversation topic. Another important topic is business continuity planning.
• Explore insurance and risk management options. Directors and officers liability insurance coverage is valuable to public and private organizations, and so is employment practices liability coverage. Both D&O and EPL policies vary, but a common advantage is they both respond to the expenses of defending lawsuits. It’s vital to work with a specialist to obtain the broadest available coverage to meet insureds’ needs.
• Start renewal process early. More time is always beneficial when preparing to renew coverage. In the current market environment, however, early renewal may afford advantages to insureds.

BOTTOM LINE

The marketplace is changing, as insurers continue to analyze their exposure to D&O claims from the COVID-19 outbreak. Higher rates, tighter terms and conditions, and additional exclusions are all in play. Further hardening in the D&O marketplace is likely as the coronavirus spreads. Triggers for D&O litigation may include public disclosures, management action or inaction, and insolvency, as early lawsuits during the pandemic suggest. Private companies are not immune from D&O litigation, even though they are not required to disclose financial information. Retail agents can assist their insureds by starting the renewal process sooner rather than later, and working with a specialist wholesale partner to understand the changing marketplace and obtain the best available protection.

For more information, please contact your CRC Group producer.

Contributors

• Jason White is a Managing Director and National Leader of the ExecPro Practice, based in Los Angeles.
• Garrett Koehn is Regional Director of CRC Group’s Western U.S. operations, based in San Francisco.

ENDNOTES

1. “Insurers fret as company bosses face coronavirus legal claims,” Business Insurance, April 1, 2020; https:// www.businessinsurance.com/article/20200401/NEWS06/912333809/Insurers-fret-as-company-bosses- face-coronavirus-legal-claims-Mayer-Brown-Inovio
2. Eric Douglas v. Norwegian Cruise Lines et al., U.S. District Court for the Southern District of Florida, March 12, 2020; https://www.classaction.org/media/douglas-v-norwegian-cruise-lines-et-al.pdf
3. Patrick McDermid v. Inovio Pharmaceuticals, U.S. District Court for the Eastern District of Pennsylvania, March 12, 2020; http://securities.stanford.edu/filings-documents/1073/IPI1200_12/2020312_f01c_20CV01402.pdf
4. “Class Actions During COVID-19,” The National Law Review, March 31, 2020; https://www.natlawreview.com/article/class- actions-during-covid-19
5. Michael Drieu et al. v. Zoom Video Communications Inc. et al., U.S. District Court for the Northern District of California, April 7, 2020; https://www.documentcloud.org/documents/6827784-Zoom-shareholder-suit.html
6. “State of the Market: Directors’ and Officers’ Liability,” CRC Group, October 2019; https://www.crcgroup.com/Tools- Intel/post/state-of-the-market-directors-officers-liability
7. “What Apple, Microsoft, GE and other U.S. companies are saying about the coronavirus outbreak,” Market Watch, March 22, 2020; https://www.marketwatch.com/story/what-apple-walmart-and-other-us-companies-are-saying-about-the- coronavirus-2020-02-18