Now in the midst of the pandemic, investors are struggling to understand the implications of disrupted supply chains and financial markets. Increased uncertainty has led to increased market volatility, paired with government measures exercised to attempt to fight the virus such as social distancing, which has stalled economies, and may lead to a recession. Just as the spread of the virus is unpredictable, so is the financial aftermath.
The pandemic will inevitably lead to insurance implications - particularly for those who have purchased D&O cover with the aim of protecting their personal assets – but as we will explore in this article, the structure and breadth of the policy can leave individuals exposed to personal losses when the policy is instead utilised for corporate protection.
As companies of all sizes begin to re-open and operate in the ‘new normal’ it is likely that certain companies (and therefore their directors) will be singled out for their handling of the crisis by customers, employees, regulators, or shareholders, and face litigation for the perceived ‘mismanagement’ of their company during the crisis. These claims could be related to the decisions made about when or how the business managed employee or customer safety, how the company communicated to customers or shareholders, how the business failed to be compliant with rules, regulation or laws – test cases will certainly inform whether or not we see an uptick in litigation relating to corporate management of the COVID-19 crisis.
The value of Side A coverage
Traditionally, D&O coverage has three insuring clauses known 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.
Side A cover can be crucial as it focuses on protecting the people insured under the policy, not the company itself – insurers pay the Director’s legal costs incurred defending a claim, offering essential protection for individuals’ personal assets that would otherwise be at risk in the event of litigation.
All D&O policies will provide Side A protection, but most commonly as part of an overall shared limit with side B & C claims, whereby all insured parties ‘share’ the coverage. In the current climate, it is therefore more important to consider dedicated Side A cover that can not only help act as a safeguard, but also to ensure that the limit cannot be exhausted by claims against the company itself (leaving some individual directors and officers, and their personal assets, exposed)
What is the impact on D&O insurance?
From employees and customers to suppliers, creditors and shareholders, businesses face an uncertain future. Many companies fear bankruptcy, as worldwide lockdowns have sent many countries heading into an economic downturn. Companies are naturally concerned about what it will mean for their operating results and what level of government support is forthcoming, which can all lead to claims.
As the pandemic transitions out of the public health crisis and into a period where we will start to notice the full economic impact, how businesses continue to respond to the effects of COVID-19 is yet to be tried and tested. With no obvious quick solution available, effective communication with all of these stakeholders could be fraught with potential litigation.
Unsurprisingly, the travel and leisure sector has become incredibly challenging when designing D&O insurance programmes, with exclusions having been applied along with 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. As a result, D&O insurers are facing an uncertain few months in what was already a challenging market to do business.
The D&O market
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 partially shielded from claims exposures in other territories, despite purchasing multinational D&O programmes, are now having to take into account global claims trends.
As a result, the market has seen significant increases in premiums, excesses and cover restrictions in all sectors and across UK public, private and US traded firms of all sizes.
At the start of the pandemic we were already seeing securities class actions resulting from the outbreak, with the likes of Norwegian Cruise Lines and Inovio Pharmaceuticals being hit by class actions in the US.
This has not been restricted to any one sector, with publicly traded companies largely bearing the brunt, and the aviation and hospitality sectors being disproportionately impacted.
As a result we have seen a retraction in insurer 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 individual underwriters and instead being referred up the chain to more senior, or global management.
From our perspective, the market is likely to 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 difficult place in which to do business. In spite of this, Gallagher remains open for business and fully operational during this lockdown period and we appreciate just how uncertain times have become for all of our clients, especially on an individual basis. If you are concerned about the level of your D&O insurance cover, or would like to know more about protecting your personal assets, please get in touch with us now.