It’s probably healthier to have an optimistic outlook in life, but when it comes to shareholder lawsuits in this COVID-19 era, optimism can come back to haunt you.
Well, as companies resume operations, many are likely to make optimistic statements about their financial conditions, operating readiness, ability to pay down debt and so on.
But what if things sour? What if infection rates, which were rising again this fall, suddenly skyrocket and the vaccines we’re waiting for don’t reach enough of us fast enough? Suddenly, those optimistic statement become fodder in shareholder lawsuits.
Not surprisingly, we’ve already seen a flurry of shareholder lawsuits triggered by the pandemic.
About 20 class-actions have been filed against companies alleging they downplayed the impact of COVID-19 on business, including lawsuits against two different cruise lines.
An animal supply company was sued for its revenue downturn, purportedly based on changes in its distribution channel because of COVID-19.
Shareholders also sued a company for falsely stating that it had developed a vaccine for COVID-19 after skeptical news reports triggered a steep decline in the company’s stock price.
The Securities and Exchange Commission is getting into the action, too.
As of mid-summer, there were at least four SEC enforcement actions filed. In each, the SEC alleged companies made statements that misrepresented their ability to profit from either the manufacture or sale of COVID-19 safety equipment and prevention products. We’re talking about face masks, thermal scanners, test kits, hand sanitizer, etc.
While all of the instances described here have involved public companies, private companies are at risk, too.
A pandemic of bankruptcy filings by private and public companies is very much a possibility in coming months and so it’s not hard to imagine that claims will follow against those companies’ directors and officers.
As you might expect, none of this is welcome news to the insurance companies that sell Directors and Officers policies.
Even before COVID-19, the D&O market already was experiencing what the insurance world refers to as a “hardening,” meaning higher premiums, higher retentions, lower limits and harder-to-find coverage for buyers.
Years of underpricing, heightened claim frequency and accumulating underwriting losses caused several major insurers to begin pushing for D&O rate increases in 2018. Rates haven’t stopped climbing since.
For the uninitiated, D&O is designed to cover the costs of defending and settling third-party liability claims against a company and its directors/officers alleging mismanagement of the company.
There are three sides, or parts, to D&O.
Side A coverage covers the wrongful acts of directors and officers whom the company does not or cannot indemnify.
Side B will reimburse the company’s indemnification of its directors and officers.
Side C covers for the company’s wrongful acts, including breach of duty, neglect, error, misstatement, misleading statement, omission, or the acts of a director or officer of the company.
The optimists among us see light at the end of the COVID-19 tunnel. There’s reason enough for them to be hopeful. As of this writing, there were nearly a dozen companies in late-stage trials of their coronavirus vaccines.
At the same time, however, COVID-19 cases were rising, a third peak was forming, and so the liability exposure for directors and officers in the winter ahead certainly appeared no less than it might have been in the spring of 2020.
Looking forward, D&O buyers can expect further rate increases, closer scrutiny from carriers during underwriting, and, again, lower liability limits.
It’s not widespread yet, but some carriers have responded to COVID-19 by adding communicable disease exclusions, as well as bankruptcy or creditor claims exclusions.
It’s important to note that there is no standard D&O insurance policy. Each D&O insurance carrier has forms that differ from their competitors’ and most policies are the subject of extensive negotiations.
Whether we’re talking about a new D&O policy or renewal, companies should expect a process that is challenging, time-consuming, and labor-intensive.
And, yes, forgive the self-serving point here, but as in most things related to business insurance, Directors and Officers insurance buyers will want to work with a knowledgeable and experienced broker.
Andrew Mahoney is the president of CCIG. Reach him at Andrew.Mahoney@thinkccig.com or at 720-330-7925.
CCIG is a Denver-area insurance, employee benefits and surety brokerage with clients nationwide. We do more than make sure you have the right policy. We help you manage your long-term cost of insurance with our risk and claims management expertise and a commitment to service excellence.