As noted in our latest State of the Market report, the coronavirus pandemic has sent shockwaves through the D&O insurance sector. The wider global stock market indices, that are so often correlated to the D&O market, are reeling - and COVID-19 related claims are already coming in.
This has not been restricted to any one single sector, with publicly traded companies largely bearing the brunt, and the building & construction industry has certainly had its share of the spotlight with the lockdown having such a tangible impact. The blame for the outbreak does not lay at the door of any one company or director, but how they have chosen to react to the pandemic and engage with their stakeholders can (and often does) lead to claims.
In such uncertain times employees, customers, creditors, suppliers and shareholders are seeking answers and how the company responds can draw unwanted attention.
As the lockdown eases and construction projects get back underway, it is important that companies balance employee safety with shareholder returns and customer satisfaction. Ensuring building sites can be operated whilst adhering to local government guidelines is not easy (i.e. how do you administer first aid from 2 metres) and providing a safe working environment is the responsibility of the employer and quite often, the buck stops at the boardroom. We have already seen companies hit with employee class actions arising out of COVID-19; so it is vital that the people in charge of running these businesses (and their response to the pandemic) stop and take time to review the level of personal protection afforded to them by their employer(s) and insurances.
The lockdown has inevitably resulted in serious cash-flow problems for many firms, and the ability to manage debt with the banks or raise more capital to weather the storm can ask questions of even the most robust of balance sheets. Directors have been forced into some quick fire decisions, and they don’t always work out. Failed rights issues and collapsed debt restructuring can all lead to D&O claims.
Like all industries, D&O insurance for the construction sector has proved difficult of late, with full programme limits of liability being difficult to replicate at renewal for the larger publicly listed firms, and rates increasing several fold regardless of client risk profile. But it’s not just the limit (and cost thereof) that’s important, but the type of programme also. Whilst a large proportion of construction companies will purchase D&O insurance, the widening of cover available under these policies in recent years (expanding, for example, to cover the company itself) can detract from the core coverage that D&O was invented to provide – protecting the individuals and their personal assets.
Traditionally, D&O coverage has three insuring clauses, commonly referred to as Sides A, B and C.
Side C is designed to protect the company itself, from exposures such as Shareholder Class Actions (for publicly listed firms), Health & Safety Investigation Costs and Corporate Manslaughter Claims; whilst side B reimburses the company when they have stepped in to pay costs on behalf of their senior people.
But what happens when the employer can no longer indemnify its individuals? Maybe it’s gone insolvent, or perhaps it is not legally permissible to do so (as some territories simply do not allow it).
Side A protection can be so crucial because, subject to policy terms and conditions, the insurer pays the costs incurred by the individual from the very first penny, offering vital protection to personal assets when they would otherwise be on the line. Costly litigation requires funding, and all defendants I’m sure would agree - they would rather an insurer foots this bill than having to potentially re-mortgage the house!
All D&O policies will provide this crucial Side A protection, but most commonly as part of an overall shared limit, and in the current climate it has never been more important to consider dedicated Side A cover that cannot be impacted by other losses. Where cover under the policy is given, it acts as a failsafe, allowing the individuals in charge of the company to sleep easy at night and to get back to doing what they do best – running the business.
Working in conjunction with our specialist financial lines division, Gallagher Construction offers a comprehensive D&O proposition for owners, developers and contractors. We at Gallagher remain open for business and fully operational during this lockdown, and we appreciate just how uncertain times have become for all of our clients, especially on an individual basis.
Would you like to talk?
If you are concerned about the level of your D&O cover, or would like to know more about protecting your personal assets, please get in touch.