Businesses, directors and management teams continue to be under significant pressure to make critical decisions for colleagues, customers and other stakeholders in addition to complying with moral and legal obligations.
It’s difficult for directors and officers to ensure they respond effectively. Decisions taken in good faith now could subsequently result in litigation, with actions brought by:
- employees for injury or breaches of employment practices law – including the risk of class actions
- shareholders, investors, or other stakeholders
So what’s the impact likely to be on D&O insurance?
D&O policies and COVID-19
Employees and customers to suppliers, creditors and shareholders all face an uncertain future. Many companies fear bankruptcy, as worldwide lockdowns send most countries heading into an economic slump; companies are naturally concerned about what it will mean for their operating results and what Government help is forthcoming. All of this can lead to claims.
With no obvious quick solution currently available, and no confirmed timeline on when things will return to normal, effective communication with all of these stakeholders could be fraught with potential litigation. How individuals and businesses respond to COVID-19 will be tried and tested. Disruption to businesses, contingency and continuity plans will be under focus for months to come as businesses navigate their way through the pandemic, and beyond.
For example, the travel and leisure sector has become incredibly challenging when designing D&O insurance programmes, with exclusions already being applied and specific requests for COVID-19 underwriting information.
This scrutiny is moving into other sectors – including retail and the financial sectors. As money stops flowing around the economy, we expect most sectors to be affected in some way. All of this leaves D&O insurers facing an uncertain few months in what was already a difficult market to do business.
D&O market and COVID-19
Whilst it is yet to be seen whether the outbreak will leak into true D&O losses, even the most spurious of unfounded claims cost money to defend – and underwriters are, understandably, concerned.
The UK D&O landscape has been altered by increased class actions and changing legal and regulatory environments globally, emphasising the accountability and liability of directors and officers. Companies which used to be slightly shielded from claims exposure in other territories, despite purchasing multinational D&O programmes, are now having to take into account global claims trends.
The result has been significant increases in premiums, excesses and cover restrictions in all sectors and across UK public, private and US traded firms of all sizes.
Already we have seen two securities class actions resulting from the outbreak, with the likes of Norwegian Cruise Lines1 and Inovio Pharmaceuticals2 taking class actions in the US arising from the pandemic.
This trend is likely to continue. We expect to see a number of insolvencies as a result of this pandemic, which may lead to future litigation.
As a result we have seen a retraction in appetite, especially for new business, with some insurers moving into an underwriting mode traditionally seen during times of recession – with authority for decision making moved away from individuals and instead moving to global senior management.
We also anticipate a significant number of other COVID-19 related claims. For example, lawsuits arising from how directors have handled the crisis, which could include:
Losses suffered by investors
Whenever the share price drops, there’s an increased risk of claims from investors. Company disclosures will be under close scrutiny and investors will look carefully at what directors say in regard to COVID-19 and the impact on the business.
Investors may allege disclosures were misleading or inadequate. They may also allege that any shortfall in performance was a result of inadequate crisis resilience and business continuity arrangements.
UK regulatory bodies may bring actions against individuals arising from an alleged failure to discharge their statutory duties e.g. in relation to the health and safety of employees at work. Whilst circumstances have changed, duties of care have not.
In the financial services sector, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have set out their expectation that firms have contingency plans in place that are effective and proportionate for their business as a result of the coronavirus outbreak. If they are found not to be adequate this could lead to a potential claim.
Increased home working and changes in the way businesses are being run can lead to enhanced data/cyber exposures as previous control procedures are inappropriate for new operating circumstances. If this results in data breaches or other losses, directors may be held responsible.
From our perspective, the market will only get tougher, as we continue to navigate a very uncertain 2020, with D&O premiums at historic highs. The true effect from COVID-19 is unlikely to be felt for a period of months or even years, and the market for D&O will remain a challenging place to do business.