In the following guest post, Francis Kean takes a look at the potential impact on COVID 19-related claims of standard D&O insurance policy exclusions. Francis is a Partner, Financial Lines, at McGill and Partners. A version of this article previously was published as a McGill client alert. I would like to thank Francis for allowing me to publish his article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Francis’s article.
I posted a blog recently on the subject of the potential impact of COVID-19 related exclusions on D&O policies. One thing to be said in favour of that type of full frontal attack on coverage is that it is easy enough to spot, although negotiating it away may be quite another matter. Of perhaps equal concern for other reasons may be the more standard D&O exclusions which could be employed to deny coverage depending on the nature of the underlying claim. In this article I focus on three such exclusions two of which are almost universally to be found in D&O policies.
The conduct exclusion
This is typically drafted in two parts. The first part applies to conduct which is driven by dishonesty or fraudulent practice. The second typically states that the carrier will not cover loss arising from, relating to or connected with “the gaining of profit or advantage by any Insured”. It is this latter part with which we are concerned here. To explain why we need to make a short detour first.
In his excellent D&O Diary Kevin LaCroix drew attention in an article he wrote about a year ago to the dangers of antitrust exclusions in D&O policies especially for private companies. (As things stand, such exclusions are not standard in non US D&O policies but that also may also change.) In a more recent piece also re-published in The D&O Diary Lawrence J. Bracken, Geffrey B. Fehling and Lorelie S. Masters highlight the increased danger of antitrust claims in the aftermath of the COVID-19 crisis. They say this:
“In the COVID-19 context, there are several potential avenues toward antitrust investigations and claims. First, both regulators and the public are increasingly sensitized to apparently opportunistic pricing, and enforcement agencies are pursuing companies for alleged price-gouging. A related risk is that of price-fixing through coordination with one’s competitors to provide products in short supply and, in some instances, to coordinate manufacturing and distribution. Again, these are classic anticompetitive activities.”
The question is to what extent might the second limb of the conduct exclusion be applied to such activities? The reference to “..any Insured” in this exclusion is almost invariably defined to cover not simply the individual directors and officers and other insured persons but also the policyholder and all the companies within the insured group. Since the very aim of anti-competitive trade practices is to gain “a profit or advantage”, the exclusion would on the face of it seem to engaged.
It is quite true that the effect of the exclusion is usually suspended unless and until there is a formal admission or final adjudication against an insured. That being said, the risk of follow on actions against individual insured persons consequent upon such findings is a far from remote. Such actions would be caught by the broad introductory language to the exclusion on the basis that they arose from or related to the offending activity. (Nor is it the case that the so called severability clause designed to separate out the coverage consequences of an individual’s knowledge or conduct would necessarily rescue the directors from this outcome because this is usually expressed only to apply to the conduct of individual insured persons and not that of the entity.)
Pending and Prior Claim Exclusions
The reality is that there are almost as many versions of this type of exclusion as there are D&O policies. It is well beyond the scope of this piece to try to describe all the different permutations and their subtly different but highly significant potential consequences. The broad point is that D&O policies are all “claims made” policies. Therefore to a greater or lesser extent, the insurers rely on these types of exclusion to ensure so far as possible that all claims made against the insured in any one policy year attach to that year alone. It is a potentially career limiting outcome for an underwriter to expose his or her employer to multiple policy limit payments in respect of the same claim. The problem is that over-exuberant exclusionary language combined with the fact-sensitive nature of the enquiry as to what constitutes “the same claim” as well as issues concerning the breadth of permissible circumstance notification to expiring policies can lead to dangerous gaps in cover for an insured.
As Greig Anderson a partner in law firm Herbert Smith Freehills puts it in an article focusing on the implications of COVID-19 for D&O:
:“…if a notification of a claim, loss or circumstance is made to the expiring year, then it is important to gauge in advance what impact that might have on coverage under the new policy in light of any “prior notice” exclusion, particularly if there is any risk that the exclusion under the new policy might have broader application than the language under the expiring policy which attaches the notified matter (and often causally related matters) to that policy. Otherwise, gaps in coverage could result…”
Pressures of the type identified above are not new. The COVID-19 crisis is likely to serve as a catalyst for these types of dispute while both insurers and policyholders scramble to maximise their respective protections. The danger is that individual insured persons could be left without protection and this risk is especially acute in the context of insolvencies about which I have blogged before.
The Pollution Exclusion
Whereas the conduct and pending and prior litigation exclusions are commonplace in all D&O policies, pollution exclusions largely died out of most sectors of the non US D&O market, at least during soft market conditions. They were usually replaced by language to be found within the definition of “Loss” making it clear that insurers did not intend to cover clean-up costs. There are though some early indications that this (among other) exclusions may be coming back. In that event there could be issues and arguments around the definition of the term “pollutants” which is itself normally the subject of extensive language. It would not be beyond the bounds of possibility for example, that among a long list of items falling within this defined term are found words such as: “germs, viruses and biological irritants”. Could these be applied to COVID-19 to deny a D&O claim relating to or arising from the current crisis? As usual the answer will depend almost entirely on the language used in the particular contract but the risk plainly exists.
The context in which the applicability of these (and other) exclusions will be played out is already one of extreme challenge for the D&O industry. The likelihood is that terms offered by insurers on renewal will be more restrictive than on the expiring policy. Insurers may well seek to restrict cover and/or ring fence their exposure to COVID-19 related claims on the new policy either overtly or otherwise. For this reason it is critically important that policyholders undertake, long before the renewal, the process of assessing the nature type and extent of D&O related litigation they might reasonably be expected to face. This is important not simply in order to make a fair presentation of the risk for the new policy but significantly also to put themselves in the best possible position to attach future claims arising out of COVID-19 to the expiring policy which is likely to contain fewer coverage restrictions. Again, much will depend on the language in each policy permitting companies to notify circumstances which may give rise to a claim and of course also on the relevant known facts. But early internal engagement of all the relevant internal stakeholders including the general counsel’s office and the involvement of appropriate external input from experienced lawyers and brokers is highly desirable.
The contents of this publication, current at the date of publication set out above, are for reference purposes only and set out the views of the author. They do not constitute legal advice and should not be relied upon as such. Specific advice about your particular circumstances should always be sought separately before taking any action based on this publication.