The market for Director’s & Officer’s Liability has been
increasingly influenced by the ongoing ‘hard’ commercial insurance market as
insurers tighten terms, reduce limits and increase their pricing. The COVID19
crisis and the litigation that has begun mounting has only added to those woes
and with that in mind we are pleased to share an update on the market for this
Our friends at the CRC Group brokerage, one of America’s
largest and oldest insurance intermediaries, recently wrote the following
article and with thanks to them for their fine work we are happy to share it
with you at this time:
Pandemic Roiling D&O Marketplace
As the coronavirus pandemic continues to
grow, the directors and officers of public and private organizations are facing
risks on two fronts: the economic impacts of COVID-19 and litigation. Adding to
the challenge is a hardening insurance marketplace.
D&O liability insurance was already undergoing a market
correction before the pandemic, after years of poor results and growth in
claims. The uncertainties that COVID-19 is bringing to all sectors of the
economy will undoubtedly lead to further changes – not only in the form of
higher rates, but also tighter terms and conditions, as well as additional
trends will make navigating a complex line of coverage even more challenging,
but they are not unprecedented. D&O insurers similarly tightened their
underwriting during the financial crisis in 2008, then eased coverage
restrictions after the global recession ended.
Times of crisis historically make directors and officers more
frequent targets of litigation, as plaintiffs scrutinize organizations’
decisions. Generally, D&O allegations tend to fall into three categories:
disclosures, particularly for public companies; mismanagement, especially when
companies post results or their share prices drop precipitously; and
Even when a lawsuit is found to have no merit, organizations
still must defend it, and those expenses can quickly mount.
D&O LAWSUITS OVER COVID-19
The Securities and Exchange Commission has encouraged public
companies to disclose the impact of the coronavirus on their operations and
financial condition, even as the SEC notes the future impact is uncertain. But
public statements can get companies into hot water, as recent litigation shows.
Several lawsuits naming organizations and their directors and
officers have already been filed with allegations relating directly to the
coronavirus pandemic.1 A sampling of lawsuits
include class actions against:
- Norwegian Cruise Line Holdings Ltd. In March, plaintiffs filed a federal securities lawsuit alleging, among other things, that the cruise line made false and misleading statements about the impact of COVID-19 on the company’s operations and business prospects. The lawsuit also cited media reports of leaked internal memos directing the cruise line’s sales staff to lie about the coronavirus.2
- Inovio Pharmaceuticals Inc. Also in March, plaintiffs filed a securities lawsuit alleging the biotechnology company made false and misleading statements that it had designed a vaccine for COVID-19 in three hours. A research firm called on the Securities and Exchange Commission to investigate Inovio’s statement, suggesting it was “ludicrous and dangerous.”3
INSURANCE MARKET REACTIONS
Conditions in the D&O marketplace began hardening early in
2019, as litigation rose, losses outpaced premium growth and insurers responded
to years of financial pressure. Underwriters’ reactions to higher losses in any
line of business can take the form of higher rates, tighter terms and
conditions, or reduced coverage. Depending on circumstances, underwriters might
exercise all of those options on a given account.6
With the coronavirus, CRC Group is observing several different
actions in the D&O marketplace, including:
- Insurers withdrawing quotes. Pulling quotes off the table is a sign that insurers are uncomfortable with the level of risk.
- Exclusions added after quoting and before binding. This is
highly unusual, and it signals that insurers are worried about
profitability. Bankruptcy exclusions are likely additions.
- Pandemic-specific exclusions. Most professional liability lines, including D&O and employment practices liability, exclude coverage for claims involving bodily injury. During the COVID-19 pandemic, the overwhelming majority of liability claims will surround consequential loss.
CRC Group has not yet seen any market exits or significant
reductions in capacity for D&O risks at this time. We anticipate that the
D&O marketplace will harden further as the impacts of the coronavirus
WAYS TO MITIGATE D&O EXPOSURE
Directors and officers need to ensure they receive timely and
accurate information regarding their organization’s operations and financial
activities. Management decisions based on faulty information could prove to be
costly and prompt lawsuits alleging false and misleading statements.
Be cautious about public statements.
More than 150 companies have so far announced disruptions of
their supply chains and many have indicated they will report lower revenues as
a result of the pandemic. Any public statements by an organization’s executive
leadership regarding the impact of the coronavirus should be based on facts.
Understating the impact of COVID-19 on revenues, supply chains and so on could
come back to haunt the organization’s directors and officers.7
Seek expert advice.
D&O risks are complex, and they require expertise in law,
insurance and business to manage properly.
Maintain D&O liability insurance.
D&O coverage generally is available in three forms: Side A,
which provides protection when an organization cannot indemnify its individual
directors and officers; Side B, which reimburses organizations when they
indemnify directors and officers; and Side C, which covers the entity when the
organization and individual directors and officers are named as co-defendants.
While the vast majority of public companies already purchase
Side A difference-in-conditions (DIC) excess coverage, it is now more critical
than ever for private and non-profit entities to add this valuable product to
their current D&O programs. The Side A DIC product maximizes person
protection of directors and officers for claims that are not indemnified.
As COVID-19 slows economic growth and forces businesses to make
difficult financial decisions, the value of Side A DIC coverage will increase
- The marketplace is changing, as insurers continue to analyze their exposure to D&O claims from the COVID-19 outbreak.
- Higher rates, tighter terms and conditions, and additional exclusions are all in play.
- Further hardening in the D&O marketplace is likely as the coronavirus spreads.
- Triggers for D&O litigation may include public disclosures, management action or inaction, and insolvency, as early lawsuits during the pandemic suggest.
- Private companies are not immune from D&O litigation, even though they are not required to disclose financial information.
To learn more about the current D&O/Executive Liability market please find last month’s article from the Insurance Journal, Directors & Officers’ Insurance Rates Surge on Fears of Coronavirus Litigation can be found here or you can contact our professional agents and Underwriter’s here at Morris & Reynolds as we are most happy to help. 305.238.1000.
- Jason White is a Managing Director and
National Leader of the ExecPro Practice, based in Los Angeles.
- Garrett Koehn is Regional Director of CRC
Group’s Western U.S. operations, based in San Francisco.
- “Insurers fret as company bosses face coronavirus legal
claims,” Business Insurance, April 1, 2020; https://
- Eric Douglas v. Norwegian Cruise Lines et al., U.S.
District Court for the Southern District of Florida, March 12, 2020; https://www.classaction.org/media/douglas-v-norwegian-cruise-lines-et-al.pdf
- Patrick McDermid v. Inovio Pharmaceuticals, U.S.
District Court for the Eastern District of Pennsylvania, March 12,
- “Class Actions During COVID-19,” The National Law
Review, March 31, 2020; https://www.natlawreview.com/article/class-
- Michael Drieu et al. v. Zoom Video Communications Inc.
et al., U.S. District Court for the Northern District of California, April
7, 2020; https://www.documentcloud.org/documents/6827784-Zoom-shareholder-suit.html
- “State of the Market: Directors’ and Officers’
Liability,” CRC Group, October 2019; https://www.crcgroup.com/Tools-
- “What Apple, Microsoft, GE and other U.S. companies are
saying about the coronavirus outbreak,” Market Watch, March 22,