Over the last few days, as updates about the spread of the coronavirus have dominated the news cycle and roiled financial markets, I have had a number of conversations about whether the emerging coronavirus outbreak could result in D&O claims. There is no doubt that if a building fire, a plane crash, or an oil spill can result in D&O claims, the impacts on any given company arising from a global pandemic might at least as a theoretical matter also result in a D&O claim. As discussed below, there are a number of ways in which circumstances surrounding the evolving coronavirus health crisis might result in D&O claims.
As of Monday morning, March 2, 2020, the World Health Organization is reporting that there have been 89,930 cases of the coronavirus worldwide, resulting in 3,043 deaths. Though there have been coronavirus cases reported in a total of 65 different countries, the vast majority of cases have been in China (over 80,000 of the nearly 90,000 reported cases).
According to the U.S. Center for Disease control, as of the morning of March 2, 2020, there were 43 known cases in the U.S., spread across ten different states. By late afternoon on March 2, there had been six reported deaths from coronavirus, all six occurring in the state of Washington.
Company Disclosures to Date
As news of coronavirus has spread and disrupted business in China and elsewhere, a number of companies have issued statements updating their prior guidance and warning that the disruption to their supply chains could affect their operating results.
For example, in late January, Levi Strauss reported that it was closing up to half of its stores in China and that the company will take a near-term financial hit as a result of the virus outbreak. On February 17, 2020, Apple issued a press release updating its prior quarterly guidance and detailing how the outbreak was disrupting its supply chain and business operations in China. Similarly, on February 26, 2020, Microsoft updated its quarterly guidance in response to the changing conditions resulting from the impacts of the coronavirus. Other companies that have prominently warned about the impact of their coronavirus on their operations and results include United Airlines Holdings and Royal Caribbean Cruises.
According to a February 28, 2020 Law 360 article (here), as of Feb. 28, a total of 606 public companies had mentioned the coronavirus in the risk factor section of their SEC filings, many of them just in the last few days as companies file their annual 10-Ks in advance of the March 2 deadline for many companies to make their annual filings.
This proliferation of coronavirus-related disclosure reflects more than just a collective company effort to update investors about the virus outbreak; the SEC has, in fact, encouraged reporting companies and their auditors to disclose to investors the anticipated impact on company operations from the coronavirus. SEC Chair Jay Clayton has said publicly that the agency will be monitoring companies’ coronavirus-related disclosures.
(For a detailed analysis of the ways in which the coronavirus outbreak may trigger SEC reporting obligations, please see the February 25, 2020 Law 360 article analyzing the factors companies may need to consider in connection with their periodic reporting obligations, here.)
The D&O Claim Exposure
The developing coronavirus-related disclosure responsibilities pose a number of risks for reporting companies. First and foremost, the coronavirus outbreak has developed quickly and evolved rapidly. This makes it challenging for companies to assess the current and likely future operating impact from the health crisis. The second is that governmental responses (such as lockdowns or quarantine orders) could quickly alter the situation in a particular country or region. The third is the uncertainty about how broadly the virus will spread and for how long the virus will continue to impact operations. A related issue is the question of how often companies will need to update their disclosures.
All of these challenges are magnified in the context of the recently roiled financial markets. The market volatility means that disclosures or revelations could have an outsized impact on company share prices. In these circumstances, what a company says or fails to say could significantly affect the price of its shares. This combination of circumstances could create conditions from which litigation might well emerge, as claimants allege that a company’s disclosure was missing, inadequate, or not appropriately updated.
As the February 28 Law 360 article cited above notes, “failure to provide adequate ‘risk factor’ disclosures could invite litigation from investors in the event of a stock drop.”
By the same token, in the weeks or months ahead, prospective claimants armed with the benefit of hindsight may claim that companies’ earlier disclosures did not adequately apprise investors of the risks that the company faced as a result of the coronavirus outbreak, or that the company failed to update prior disclosures as circumstances evolved.
In addition to potential disclosure-related claims, prospective future claimants may attempt to assert mismanagement claims based on allegations that the company management failed to respond sufficiently or appropriately to dramatically changed operating conditions, or failed to ensure that the company’s supply chain allowed for alternative supply arrangements.
The disrupted operating conditions also create potentially fertile grounds for claims between and among customers, vendors, suppliers, and competitors – and some of these claims could well involve business tort-type claims or other potential D&O claims.
Whether and to what extent the current coronavirus outbreak might result in D&O claims of course remains to be seen. In the meantime, this rapidly evolving but uncertain potential risk exposure presents D&O insurance underwriters with a challenge, particularly on the question of how to consider this issue while underwriting any particular account.
Certainly the consideration of the potential impact of the outbreak on any particular company has to start with the company’s operations. Does the company have extensive operations in China, Korea, or other Asian countries that have been significantly affected by the outbreak? Does the company have an extended global supply chain that could be disrupted by further spread of the coronavirus? Is the company in a business (e.g., leisure travel, airlines) whose global operations likely will be impacted by the disruption in global trade, communications, and travel?
With respect to companies likely to experience an operations impact, the next question is the company’s coronavirus-related disclosure. Has the company detailed the potential impact of the health crisis on its operations in its risk-factor disclosure? Is the company’s disclosure detailed and company-specific, or is it generic, non-specific, and overly broad?
It is worth noting that the coronavirus outbreak will actually boost some companies. Obviously, companies seeking to develop a coronavirus vaccine and other healthcare companies (e.g., medical mask manufacturers, hand-sanitizer makers) could benefit. But there are others that also could benefit, for example, videoconferencing companies. Movie theater chains will suffer, but Netflix will prosper. Fast food chains may see a drop off, but Campbell’s Soup is going to rule. Other companies that might benefit are those whose performance shows that they have resilient or alternative supply chains. Given the possibility of divergent impacts, it will be important for D&O insurance underwriters not to sweep with too broad of a brush.
Another challenge for D&O Insurance underwriters is how to weigh the coronavirus risk in the context of other threats moving through the business environment. Cybersecurity remains a significant and challenging exposure. Privacy issues continue to emerge as a significant business challenge. Ongoing regulatory enforcement exposures (antitrust, corruption, money laundering, environmental) continue. The possibility of fallout and disruption from Brexit and global trade wars has not gone away. The upcoming U.S. Presidential election presents its own set of uncertainties.
For D&O insurance buyers, an important consideration will be the extent to which proposed terms include terms that could preclude or affect coverage for a coronavirus-related claim. While at this point, no carriers are quoting terms with specific coronavirus-related restrictions, it is something to watch for. Another thing to consider is whether other terms might affect coverage for a coronavirus-related claim. For example, a broadly worded bodily injury/property damage related exclusion potentially could be a problem; buyers will want to ensure that the BI/PD exclusion has the “for” wording, and not the broader “based upon, arising out of” formulation.
In the context of the many other current threats and exposures, the coronavirus is only one of several potentially disruptive circumstances. All of these threats are developing in the context of a D&O insurance marketplace that is already disrupted as the market cycles through the problems associated with poor underwriting results and other consequences of years of underpricing. The cumulative impact of all of these factors suggest that the current disruption in the D&O marketplace is likely to continue for the foreseeable future.
On a Related Note: In response to the coronavirus outbreak, many employers are encouraging their employees to work from home. However, as pointed out in a recent memo from AON, there may be other risks — and in particular, cybersecurity risks — when increased numbers of employees are working remotely.