Authors: Heidi Roberts
Directors & Officers (D&O) liability in the U.S., as a whole, was faced with a hardening market when we started 2020. At that time, we could not predict just how much the events of the year would impact the private and nonprofit sectors, and arguably small businesses in particular.
Economic impact of COVID-19
The implications of the COVID-19 pandemic have been far-reaching, including an impact on the uncertain economy, and anticipated increases in bankruptcy filings and insolvencies. However, even if a business was deemed to be essential, the decisions of the directors and officers may be called into question. Key factors directors and officers may need to explore include the following.
- The increased pressure on any entity's leadership during this year was paramount. Even if you made the decision to keep your doors open, it may not be business as usual and you could be at higher risk for lawsuits if, for example, ever-changing health and safety protocols were not followed.
- There were instances where it may have been impossible to have a quorum with your board due to extenuating circumstances, resulting in higher scrutiny of the decision-makers who acted swiftly when changing business operations or making financial decisions.
- We are still in a holding pattern as we experience daily changes in restrictions by state. So it is unclear what lawsuits will arise, but we anticipate that the frequency and severity of the allegations will significantly increase.
Small businesses adjusting to the COVID-19 impact
Although larger companies may be a bigger target for litigation, the ramifications of the far-reaching impacts of the COVID-19 pandemic impacted smaller businesses. As mentioned above, the world seemed to change day to day as COVID-19 restrictions evolved across the country. Though one may argue that smaller businesses may be more nimble, many times they may not have had the internal resources or plans to adjust.
The Paycheck Protection Program (PPP) was a new program for companies with less than 500 employees. But this program also may have introduced challenges for small business owners who may not have had the technological resources to handle the change in operations (i.e., equipping employees with technology and equipment to work from home or with personal protective equipment [PPE] when working on-site). The hospitality and retail industries come to mind when thinking of the smaller entities most impacted, and we have seen many local and mom-and-pop shops and restaurants closing their doors this year.
Market response and insurance underwriting process implications
The D&O liability markets have responded in a variety of ways to the uncertainty of 2020. In the early days of the COVID-19 pandemic, some markets provided extensions when clients could not respond, complete renewal applications or provide information in a timely manner. On some smaller accounts, they were even able to offer automatic renewal quotations.
The same market, however, may have also been faced with making decisions without much notice with the dynamic environment, including:
- Requiring additional information aside from the typical application and financial statements, but also questionnaires regarding continuity plans, return to workplace, etc.
- Reducing limits
- Increasing retentions
- Eliminating additional D&O Side A limits
- Adding exclusions like antitrust, insolvency and communicable diseases
In addition, it became challenging to predict premium increases. Although we knew we were facing a hardening insurance market for this sector, the dramatic change in rate changes can easily be seen in the charts below.