On March 12, 2020, a plaintiff shareholder filed a securities class action lawsuit against Norwegian Cruise Line Holdings, alleging that the company was employing misleading sales tactics related to COVID-19 bookings and cancellations¹. Another D&O claim was lodged soon after against Inovio Pharmaceuticals relating to statements the company made about developing a vaccine for COVID-19².
As a result of this action, the applicability and availability of Directors and Officers Liability Cover for COVID-19 related claims is now very much top of mind. Potentially, we could see more D&O claims against companies for failure, or inadequate or inaccurate representations about the impact that COVID-19 will have on the business, stakeholders and customers? ³
Where we would have expected actions around breach of the fiduciary duty of care to be at the forefront, there is greater prevalence to questions around opportunistic or unethical behaviour relating to the COVID-19 matter. The potential for D&O actions emanating from the responses to the COVID-19 pandemic might not be as far a stretch as it seemed at first glance. Consider the following simple examples:
• The allowance of panic buying by the retail sector and failure to cap the number of single stock items being purchased, especially on essential items, is of great concern. This activity is mostly perpetrated by those individuals who have sufficient funds to do a mass shop, leaving the shelves bare for those who will need to wait until month end. Should retailers not be adopting and encouraging a sense of community by limiting the number of items per customer?
• With regards to provision of hygiene products or protocol, how far does the duty of care go relative to advising employees on matters of personal hygiene?
• Also, where does the balance lie between the duty of care that directors have around Occupational Health and Safety issues with the duty of care to ensure a financially sustainable business, able to pay salaries and provide for the financial livelihoods of their employees?
The government has declared a status quo and there could be repercussions for any organisation where there is disregard or lack of cooperation in implementing the Government’s plan. Reputational damage and investor confidence could also become factors for those companies taking an opportunistic approach, as opposed to community-based approach to the matter.
When does healthy competition cross over into anti-competitive behaviour where companies start gouging prices on essential items, or selling sub-standard products purporting to be the real thing – as is happening with fake hand sanitisers flooding the market at the moment?
Many of the questions posed are not matters that we will have clarity on for quite some time, but in the interim we can address what potential cover may be available in the Directors and Officers liability market.
There are numerous policy forms available in the market each with its own exclusions, extensions and conditions. From a general perspective, most D&O policies have an exclusion relating to bodily injury/property damages/sickness/death which, at first reading, would imply that there is no cover, however, the wording needs to be looked at closely to establish the extent of absolute or partial exclusion.
An absolute exclusion would usually reference words such as ‘arising from, directly or indirectly or in consequence of bodily injury/property damage’ in which instance there would be no cover. In the event that the exclusion is written with a “for” preamble, there should be an element of cover for consequential losses. These losses would still need to fall within the ambit of D&O insurance being losses following from actual or alleged wrongful acts/errors or omissions by directors or officers in their capacity as directors or officers of the company.
In practice, if a director has taken reasonable steps to ensure the safety of the company employees but there is still an allegation that these steps were insufficient, then the policy should respond to the legal defence costs in defending such a matter in much the same way as any allegation that a D&O was negligent in failing to carry our duties as prescribed by the Occupational Health and Safety Act.
In the event that litigation is brought against a D&O and there is an adverse adjudication, then cover would cease with no payments in respect of judgements or settlements. In the event that the adjudication determining the D&O’s actions to be wilful or criminal, then cover would rescind in its entirety with Insurers likely to recover any costs already outlaid.
We are facing unprecedented challenges with immediate decisions made without thorough consideration to the future ramifications. In instances where a decision may not have been the most prudent relative to looking forward, but was in the best interests of a company in the moment, then provided there was no ill-intent, just bad judgement, then an element of protection should still be explored.
The bottom line is there is no stock-standard D&O policy in the market and policy coverage, conditions and exclusions vary across the market and from business to business, depending on their needs. Potentially, down the line we could see increasing underwriting scrutiny when it comes to pandemic risk, business continuity plans, impact and response plans – and whether there will be specific exclusions for pandemic risk in a market where D&O insurance conditions continue to deteriorate with premium increases needed to generate a sustainable rate level to cover.
It’s crucial to consult with your professional broker and legal counsel as to how your policy will respond with regard to your planned and actual response to the COVID-19 crisis. Talk to Aon if you need any assistance in exploring your Directors and Officers liability insurance during this uncertain and disruptive time.