Much has changed since I published my first coronavirus-related post a month ago. The number of confirmed cases and of deaths has soared. Much of the country is now on lockdown. School, work, business — so much of basic social and economic activity has stopped. Much has changed in the D&O arena as well. There have been both claims and underwriting developments, and a number of trends have emerged. In the post below, I discuss some of these developments and trends. I recognize that my observations are limited by my own personal perspective; it is my hope that others will share their observations about the current environment using the comment feature to add their views to this post.
When I first wrote about the D&O implications of the coronavirus outbreak on March 2, I speculated that there likely would be D&O claims arising from the pandemic. As readers of this blog already know, there have in fact been two coronavirus-related securities class action lawsuits filed already – one against Norwegian Cruise Lines (about which refer here) and one against Inovio (about which refer here). There likely will be others coronavirus-related D&O claims as well.
The claims that we shall see are likely to involve alleged disclosure allegations (like the two cases that have been filed already); mismanagement allegations; and insolvency-related claims. As the panelists discussed in the recent Professional Liability Underwriting Society (PLUS) session addressing D&O coronavirus-related concerns (here), at this point the insolvency-related claims seem the most likely.
Businesses shuttered by governmental stay-at-home orders are struggling, as are companies dealing with the economic and business fallout from the pandemic’s disruptive effects. Several companies have already filed for bankruptcy as a result; for example, last week, Whiting Petroleum filed for bankruptcy, and earlier, diabetes device maker Valeritis was forced into bankruptcy. Unfortunately, other companies will follow these into bankruptcy as well.
As companies seek bankruptcy protection, the likelihood is that Trustee and creditor claims will follow. (In that regard, please see my recent post about directors’ duties as companies head toward bankruptcy.) Significantly, with in the context of the D&O arena, the insolvency risk is a concern both for public and private companies, meaning that the risk of bankruptcy claims affects both public and private companies.
While bankruptcy claims seem most likely, there will undoubtedly be other D&O claims as well. Among other issues that will attract scrutiny, regulatory attention, and possible claims is insider trading, as discussed in a March 31, 2020 memo from the Ballard Spahr law firm (here).
I was asked recently whether I thought there would be fewer, the same number, or more coronavirus-related D&O claims as there were D&O claims in the wake of the global financial crisis. My answer at the time was that I thought that there would be fewer coronavirus-related claims. My logic at the time was that because the coronavirus came out of the blue, so to speak, the plaintiffs’ lawyers will have a much harder time than they did after the financial crisis reaching back into the past and seizing on prior statements or prior actions that, with the benefit of 20/20 hindsight, allegedly were misleading or negligent.
Even at the time I gave my original answer, I hedged my response in a couple of ways. First, I said that, like the financial crisis-related claims, the coronavirus-related claims will play out over a long time period, perhaps as long as 36 to 48 months, as companies make statements about their ability to bounce back, about their financial condition, about their extent of their resumed operations. As companies struggle to find their footing, plaintiffs’ lawyers will seek to seize on these statements or accompanying actions as the bases for claims. The bulk of the coronavirus-related claims could come in the future.
Second, the number and scope of the coronavirus-related claims will depend in significant measure on the bankruptcy related claims. There could well be a significant number of bankruptcy-related claims.
As I have reflected further on my prior answer, one further consideration has occurred to me that may affect the ultimate scope and number of coronavirus-related claims, compared to the claims we saw following the global financial crisis. The financial crisis-related claims were largely concentrated in the financial and real estate related sectors, as those sectors were the hardest hit. It occurs to me that the coronavirus-related claims may not be as concentrated, as the disruption from the coronavirus likely will be widespread, hitting just about every sector of the economy.
To be sure, here in the early stages of the pandemic there are certain sectors that have been particularly hard hit – airlines, hotels, restaurants, cruise lines, casinos, movie theaters, as well as oil and gas producers and related businesses – but the massive slowdown into which we are just now entering eventually will cut across just about the entire economy. For that reason, the coronavirus-related claims may not be contained to just a narrow set of industrial sectors; the claims, like the economic fallout, could be widespread. The extent of the spread in turn could affect the overall number of claims that ultimately are filed.
It does occur to me that there may be a slight silver lining here, at least when it comes to the numbers of claims filings, at least over the next few months. As the disruption to the financial markets continues over the coming weeks and months, M&A activity and the number of IPOs will be suppressed. In the most recent years in which the number of securities class action lawsuits soared, M&A and IPO activities were important contributors to the overall number of lawsuit filings. Fewer merger transactions and fewer IPOs will likely translate into fewer M&A-related and IPO-related securities suit filings, which in turn could translate into fewer overall number of securities suit filings. We all hope that any decline in these kinds of financial transactions is only temporary and that planned transactions are only postponed not cancelled altogether; if the transactions do come back, as we all hope, then the related claims activity will also bounce back as well.
One final claims-related thought has to do with one likely consequence if in fact bankruptcy claims do materialize in scale. If these claims do materialize, the Side A coverage in the bankrupt companies’ D&O insurance program could prove to be particularly important. This possibility obviously has significant implications for the D&O insurers that have been active in writing Excess Side A insurance. The looming bankruptcy threat could present a serious challenge to these insurers. On April 2, 2020, the Kennedys law firm published an interesting memo looking at the coming coronavirus-related claims from the Side A insurer perspective (here).
For a thorough overview of the D&O insurance issues that may arise and policy terms and conditions that may come into play in the event of a COVID 19-related D&O claim, please see the March 31, 2020 memo written by John Orr and Rob Yellen of Willis Towers Watson, here.
The coronavirus outbreak-related crisis has emerged quickly, and the D&O insurers have been struggling to respond. Of most immediate consequence, there have been a host of process-related issues and problems. Questions such as the possibility of coverage extensions, as well as issues related to notices of cancellation, payment delays, and even notice of claim timeliness issues are causing significant problems, and in many states are the subject of regulatory orders, directives and guidelines.
Beyond the immediacy of these process-related issues, the D&O insurers have been struggling to develop their underwriting approach to the suddenly but dramatically changes circumstances. In considering the way the D&O insurance industry has responded, it is critical to understand that the industry was already disrupted before the coronavirus outbreak further roiled things up. The D&O insurers were already reeling from years of underpricing, adverse prior year loss development, and record levels of claims activity. Even before the pandemic arose, policyholders were facing increased pricing, higher retentions, and more challenging underwriting conditions generally. The coronavirus outbreak has exacerbated all of this conditions, further dislocating an already disrupted D&O insurance marketplace. In this uncertain context, the D&O insurers have taken a number of specific underwriting actions.
A number of insurers have already begun using coronavirus-related questionnaires. Insurers are using these questionnaires not just for D&O placements but for placements in other coverage lines, such as EPL and Cyber. In the D&O space, the questions typical seek to find out about how the coronavirus outbreak has affected operations and related work-force issues; whether the company has furloughed employees or plans a reduction in force; how stay-at-home orders have affected the company’s operations and finances; and how the company is positioned in terms of cash resources, cash flow, liquidity, and credit.
The D&O insurers are all too aware of the claims concerns I discussed above. The insurers are all trying to find ways to contain their risk. While most insurers generally are taking business-like approach to their renewal accounts, many insurers have also stepped back from writing new business. A few insurers have indicated that for now they are not writing any new business at all, or at least any new business in certain industries. Others have made it clear that if they write new business, it will involve lower limits and more restrictive terms (including higher deductibles and even restricted past acts coverage) than they would have been willing to provide only a short time ago.
There is a lot of discussion now about the possibility of insurers trying to introduce coronavirus or infection disease related exclusions. We have certainly seen these kinds of exclusions being proposed in the E&O sector. There is a lot of talk, in the trade press and in general, about D&O insurers trying to introduce these kinds of exclusions. I have not yet seen any account written with these kinds of exclusions. Obviously, the possibility of these kinds of exclusions in a D&O policy is very undesirable from the policyholder’s perspective.
As far as added exclusions, we have seen insurers trying to add bankruptcy exclusions or exclusions for trustee or creditors’ claims. As weak companies struggle in the disrupted economy, carriers’ attempts to introduce these kinds of exclusions are likely to continue. We have also seen insurers trying to introduce reduction-in-force exclusions, or even try to restrict coverage for past acts, at least for certain kinds of accounts. The carriers’ efforts to try to introduce these kinds of exclusions and restrictions could well be battleground issues in many upcoming renewals.
A number of carriers are trying to manage their capacity by reducing the limits of liability they are willing to quote, at least for certain kinds of accounts. A number of carriers are unwilling to increase limits while other carriers are unwilling to participate on new excess layers.
As carriers have responded to the developing public health crisis, certain businesses may suddenly find themselves in a newly disfavored sector. Businesses that in the past may have been mainstream and or even humdrum now may be in a distressed class. The airlines, hotels, restaurants and so on that I mentioned above fall into this group. Different insurers are also identifying other segments they are worried about — say, nursing homes or auto dealerships.
This entirely new risk segmentation environment may make the upcoming D&O insurance renewals a very different experience for many companies. The carriers’ quickly evolving views on these kinds of topics makes it particularly challenging to project what different accounts might expect as part of their renewal.
The coronavirus outbreak may also further exacerbate the D&O pricing increases that the insurers were already seeking before the pandemic expanded in the U.S. Both public and private company D&O insurance buyers were already facing the prospect of increased D&O insurance costs. For many companies, particularly those in the industries most immediate affected by the outbreak, the pricing increases may now be even greater – a development that would be unwelcome at any time, but will be particularly unwelcome at a time when business is disrupted and cash flows may be uncertain. This dynamic may make the upcoming D&O insurance renewal cycle particularly challenging for many buyers.
We are still only in the very early stages of this crisis. The situation overall will continue to develop and evolve, as will the situation in the D&O insurance marketplace. The one thing for certain is that the D&O marketplace will be disrupted for some time to come.
What that means for policyholders is that their D&O insurance purchase process will be challenging in ways that it never has been in the past. The process will take longer and be more unpredictable than it has ever been. For some companies, it could be a very rough ride. Now more than ever it is going to be important for companies to enlist the assistance of an experienced and knowledgeable advisor in their insurance purchase process.
This is a time when experience and expertise is going to make a difference. This is a time when experience and expertise is going to be indispensable.
Five Years of Omnicare: Five years ago, in March 2015, the U.S. Supreme Court issued its landmark opinion in the Omnicare case, as discussed here. In a April 2, 2020 post on his D&O Discourse blog (here), Doug Greene of the BakerHostetler law firm takes a Fifth Anniversary look at the Omnicare decision and how it has been interpreted and applied, as well as the strategies Doug suggests that defense counsel may use to take better advantage of the decision.