The principal focus in considering insurance coverage for COVID-19-related losses and liabilities has, thus far, primarily concerned business interruption coverage. But there are many other types of coverage that could come into play as businesses recover. Among the various other types of insurance coverage that could be implicated is Directors & Officers (“D&O”) liability insurance.
In the simplest terms, D&O insurance is meant to protect a company’s directors and officers from claims alleging that a mistake, bad judgment, or other malfeasance in operating a business has caused the business to suffer some form of loss or to incur some form of liability. These various circumstances are embodied in the definitions of what D&O policies refer to as “Wrongful Acts.” A typical “Wrongful Acts” definition includes the breach of a duty, neglect, error, misstatement, misleading statement, omission, or act of a director and/or officer of a company. Securities litigation and, to a more limited extent, regulatory investigations are the classic types of claims that arise from conduct typically encompassed within a “Wrongful Act” definition. There are generally three parts to a D&O policy, called Side A, B, and C coverage. Side A coverage is for “Wrongful Acts” committed by directors and/or officers that the company does not or cannot indemnify. Side B coverage exists to reimburse the company for indemnity payments the company makes on behalf of directors and/or officers for their “Wrongful Acts.” Finally, Side C coverage insures the company itself when it is sued. For public companies, Side C coverage is typically triggered only by securities claims. Privately held companies may be covered for a broader range of claims involving the “Wrongful Acts” of directors and officers. D&O Insurance covers not only indemnity payments but also defense costs, i.e. the costs necessary to respond to any litigation or investigation.
As far as COVID-19 is concerned, decisions that companies have made in order to operate under these difficult circumstances may be called into question as things return to “normal.” For example, companies have had to respond to the challenges of the pandemic and to issue public statements about that response. These actions could potentially prompt securities litigation (direct and derivative securities claims) and class actions to the extent that companies and/or a company’s directors and officers have allegedly failed to respond adequately or have made false statements to shareholders and/or the public. Similarly, a company’s financial reports may come under scrutiny, particularly if the company suffered a substantial loss as a result of COVID-19.
Here are a few examples of the types of challenges that might trigger D&O Insurance:
- A company has been unable to make payments because of the financial impact of COVID-19 and faces mismanagement claims as a result. Similarly, a company could face litigation or investigation if allegations emerge that the company failed to inform shareholders of the financial impact of COVID-19 on the business or downplayed the significance.
- A company initiated layoffs due to the financial impact of COVID-19, and litigation is brought alleging that decisions made by the company’s officers and directors resulted in the company failing to comply with employment-related rules and regulations, such as providing insufficient notice to employees of any layoffs or closings or by violating wage and hour laws.
- A company allegedly implemented inadequate health and safety precautions to prevent the spread of COVID-19 and the directors and officers of a company are sued based on negligence in developing and implementing adequate COVID-19 guidelines and/or procedures. This was the case, for example, in a wrongful death suit brought against a major retailer by an employee’s estate and in an action brought against a cruise line by a passenger.
- A company is faced with an antitrust claim alleging that it has engaged in price fixing or price gouging during the pandemic. Suits have already been brought against certain on-line stores on these grounds by private consumers alleging price fixing regarding emergency and household equipment.
- Fiduciary liability claims could emerge regarding impacts to benefits such as an employer’s stock-ownership plan, bonus systems, health benefits, retirement plans, and other benefits.
The above list represents the types of COVID-19-related claims that might come into play, but it is by no means exhaustive. Indeed, suits have already been brought alleging more egregious wrongful acts. Putative class actions also have been brought against universities for continuing to collect tuition when the schools were physically closed, and it is speculated that other business, such as gyms, could face the same. As an extreme example, litigation has also been brought against companies for falsely stating that they had created a vaccine or cure.
As more claims are brought and investigations commenced, more policyholders likely will be making claims against their D&O policies and insurers may attempt to limit their liability. For example, insurers may adopt restrictive policy language interpretations limiting the scope of “Wrongful Acts,” despite that term’s broad definition. They also may rely on various exclusions such as, for example, the “bodily injury” exclusion which is standard in most D&O policies. Indeed, insurers may attempt to rely on such “bodily injury” exclusions even in the context of securities claims on the premise that the cause of a financial loss was the mishandling of underlying bodily injury exposures. Another potentially relevant exclusion is the “pollution” exclusion, which an insurer may argue excludes viruses, and/or a “virus” exclusion, if your policy has one. Although these exclusions are particularly likely to be raised in the context of COVID-19, insurers may of course raise exclusions beyond those listed here.
Insurers may also attempt to limit the scope of available coverage going forward by adding exclusions or other limitations during a policy’s renewal process. For example, to the extent a policy does not already include a “virus” exclusion, an insurer might seek to add one to the policy’s renewal. Or, in an effort to ensure that a policyholder is not able to obtain coverage for claims arising from shutdowns by governmental or civil authorities in the context of a pandemic or otherwise, an insurer might add exclusions to address those events as well. Given the magnitude of losses and liabilities arising from the ongoing pandemic, policyholders should closely review any proposed changes to policy language to ascertain whether any amendments modifying even existing exclusions would meaningfully limit coverage for future claims. Such limitations could be significant because, even though the cause of a loss might be taking place now—as is the case with COVID-19—claims by shareholders, among others, could be brought in the future and it is not outside the realm of possibility that an insurer will seek to avoid coverage for future claims by adding exclusions or other limiting provisions during an approaching renewal.
In that regard, if you believe your company may later be subject to a claim that has not yet materialized, it may be prudent to provide a “notice of circumstances” to your insurer. A “notice of circumstances” allows a policyholder to trigger a policy before a claim arises based on knowledge of an event or “circumstances” that could give rise to a future claim. Again, using the above examples, if a company’s employees are asserting that the company failed to undertake adequate safety measures, this could be a circumstance that might later give rise to a claim covered under a D&O policy.
COVID-19 has had a devastating financial impact on many businesses, and, when there is loss, litigation often ensues. A first step in responding to any such litigation should be an assessment of a company’s insurance portfolio to determine whether there are any insurance policies that are meant to protect the company against such litigation. D&O coverage is a key component of most commercial insurance policies and should be considered as part of this effort.