In early March, when I first wrote about the possibility of coronavirus-related D&O claims, there were then a total of 43 confirmed cases of COVID-19 in the U.S. and six deaths. In early April, when I published my first interim update to my initial post, the number of confirmed COVID-19 cases in the U.S. had grown to 267,436 and the number of deaths was over 10,400. Now, a month later, the number of confirmed cases in the U.S. has exceeded 1.2 million and the number of deaths is over 78,000. By now it is apparent that the coronavirus-outbreak represents the most significant public health crisis in the U.S. in more than a century. The disease has also had a massive impact on the economy, both within the U.S. and globally, in ways that are only now starting to be fully appreciated.

With so many households and businesses disrupted, it is hardly a surprise that disputes have arisen. Some of these disputes have translated into lawsuits, including even lawsuits involving corporate directors and officers. Just as it will likely be some time before we fully understand the pandemic’s economic impact, it likely will be some time before the full litigation burden can be fully assessed as well.  My latest interim update follows.

Claims Trends

For now at least, the numbers reflecting the level of coronavirus-related D&O claims activity are relatively modest. By my count, there have been a total of five pandemic-related securities class action lawsuit, involving Norwegian Cruise Lines (here); Inovio (here); Zoom (here); Phoenix Tree Holdings Ltd. (here); and SCWorx (here). Given that we are now more than two months into the unfolding pandemic, the number of securities lawsuits so far seems relatively modest.  Most of the cases have to do with statements or actions the companies made or took (or failed to take or make) in response to the coronavirus outbreak itself.

In addition to the securities class action lawsuits, there has also been one coronavirus-related shareholder derivative lawsuits, against Inovio (here), and based on the same allegations as the securities suit against the company. There has also been one coronavirus-outbreak related SEC enforcement action, against Praxsyn Corporation, for the company’s statements about arrangements it claimed it had made to source and sell surgical masks (as discussed here).

While the number of D&O claims so far is relatively modest, it seems likely that there will be more claims in the weeks and months ahead, as businesses struggle to re-open and to deal with the impact of the coronavirus closures on revenues, operations, and finances. The modest number of suits so far may be due to the fact that prior to the outbreak very few companies had occasion to made any statements about the what impact a pandemic might have on business operations, providing few openings for plaintiffs’ lawyers to try to portray prior statements as misrepresentations.

But as the economy starts to open back up, companies will be making many statements about their operating readiness and capabilities; about their supply chain; about their customer traffic or order flow; about their workplace, labor force, and business operations; and about their cash, their reserves, the collectability of receivables, and other financial attributes. Companies that stumble after optimistic statements may likely attract the unwanted attention of plaintiffs’ lawyers.

The way that companies navigate the reopening process could also open the door for potential mismanagement claims, as well as claims against boards for alleged breaches of the duty of care or breach of the duty of oversight.

A number of companies will fail or go bankrupt. There have already been a number of high-profile bankruptcies, including most notably in the last week J. Crew and Neiman Marcus. Many smaller businesses have also filed for bankruptcy, particularly in the hospitality and leisure sectors. Other sectors currently under stress likely will see a number of bankruptcies, including the oil and gas sector. Other companies that before the pandemic took on significant amounts of debt to pursue expansion strategies or to acquire competitors may also be forced into bankruptcy. One side-effect of this anticipated surge in bankruptcies likely will be a wave of D&O claims filed by creditors or bankruptcy trustees.

Even beyond the narrow confines of the D&O claims arena, there has already been a significant rise in litigation activity. For example, disgruntled students are suing colleges and universities for the return of tuition for classes that were cancelled or moved online, as well for amounts paid for room and board. Employees who contracted the disease (or their survivors) are suing employees for their injuries or harm (as discussed here). And as I discussed in a recent post (here), as employees return to work, claims and disputes involving discrimination may well emerge, along with wage and hour concerns and other workplace issues. As noted in a May 8, 2020 Marketwatch article (here), the courts may be about to be flooded with coronavirus claims, in a way that may be unprecedented.

Underwriting Issues

None of these developments are lost on D&O insurance underwriters. The underwriters and their managers are all too aware of the baleful possibilities these circumstances present. It is important to note in that regard that well before the coronavirus outbreak emerged the D&O insurance marketplace was already disrupted. Even before the outbreak, policyholders were facing the prospect of significantly increased cost for their D&O insurance. Now, with the pandemic added on top, policyholders are facing a D&O insurance market that is in many ways in disarray. There are a number of specific ways D&O insurance policyholders will experience the impact of the coronavirus.

Increased Underwriting: As I noted in my prior update, many insurers are now requiring renewal applicants to complete a coronavirus-related questionnaire. In order to provide terms, many insurers are requiring insureds to provide detailed information about the impact of stay-at-home orders on business operations; the impact of the pandemic itself on work force and supply chain issues; the impact of closures on cash flows, cash reserves, liquidity, and revenue streams, as well as current and long-term debt. The entire process has become more time-consuming, more labor-intensive, and a lot more unpredictable. The coronavirus-related information is also having a direct impact on the terms and conditions that are being offered.

Lack of Process Flexibility: Many front-line underwriters have had much of their discretion taken away and layers of management approval are increasingly common. These circumstances have contributed to the more time-consuming nature of the renewal process. Front-line underwriters also have strict guidelines about certain kinds of risks, about companies with certain characteristics, as well as about what terms and conditions may be offered. Even though the process concerns and time requirements naturally lead to extension requests, at least some underwriters are unwilling to provide extensions that in the past would have been routine, and even if the need for an extension is the direct result of the operating disruption caused by stay-at-home orders.

Pricing: As noted above, D&O insurance buyers were already facing significant pricing increases even before the pandemic arose. Now, buyers continue to face increases, but in many cases even higher than was the case before. In some cases, the increases proposed have been eye-watering – creating a very difficult dilemma for insurance buyers, as they face dramatically increased insurance costs at the same time as their revenues have dropped off of a cliff. For some buyers, the increased costs present them with hard choices about possibly reducing the amount of insurance they buy, at a time when they know well that the risk could be greater than ever.

Terms and Conditions: In many instances, the terms and conditions offered may involve certain significant reductions in coverage. At least some insurers for some accounts are providing quotes with COVID-19 or infectious disease exclusions. (The addition of these types of exclusions is even more prevalent in the E&O sector.) Many quotes also include comprehensive bankruptcy exclusions or creditor claims exclusions. For some underwriters, the inclusion of a bankruptcy or creditor claim exclusion is the default response for applicants who are slow in providing coronavirus-related underwriting information, even if the applicant is not a bankruptcy risk.

Capacity: Many insurers are actively managing their capacity and seeking to reduce the limits exposed. Insurers that may have offered, say, a $5 million limit in the past may now offer only $2 million or even $1 million (particularly for accounts in certain sectors that are perceived as high-risk in the wake of the pandemic). Few competitors are willing to step in and fill in the reduced layers, meaning that filling out a buyer’s program can become very difficult or in some cases simply not possible.

Other Issues: Few insurers are willing to participate in increased excess limits. Because of the perceived economy-wide insolvency risks, few insurers are willing to offer terms for new or increased Excess Side A DIC coverage. Few insurers are looking to write new business – first time buyers may find that they have few if any options.

Discussion

I have been involved in D&O insurance one way or the other for 38 years. The current D&O insurance marketplace is the most disrupted and unpredictable I have ever seen. Just trying to get a handle on the current situation is difficult, as all of the pieces on the board continue to move and shift. Trying to project what may be ahead is even more difficult, because so much depends on how long the current health crisis lasts, on now the re-opening process unfolds, and how soon the wheels of commerce get rolling again.

While there is a great deal of uncertainty, certain things are clear.  For starters, the coronavirus outbreak already is a watershed event for the insurance industry. In his comments in his company’s quarterly earnings release this past week, AIG CEO Brian Duperrault said that “We believe COVID-19 will be the single largest CAT (catastrophe) loss the industry has ever seen.” This is a dramatic statement, but I think Mr. Duperrault is correct. It may take a long time to play out, but there is no doubt that the COVID-19 pandemic represents a massive event for the global insurance industry.

What this may mean in the months ahead remains to be seen. However, I think I can say for certainty that we are going to be in a so-called hard market for some time to come, likely well into 2021.

What that will mean for policyholders and D&O insurance buyers is that for some time to come, there are not going to be any “routine” D&O insurance placements. Every transaction is going to be drawn out and complicated.

The insurance renewal process itself will be far different than buyers have experienced in the past. The process will be much more time-consuming and labor-intensive than in the past. Buyers will need to be prepared to spend a lot more time and effort on their D&O insurance transaction. One specific thing buyers can do to position themselves is to proactively anticipate the questions about the impact of the coronavirus and work-from-home orders on business operations; supply chain, work place, and labor force issues; and cash and liquidity; ability to service debt and accounts payable; and re-opening plans and expectations.

Buyers will also have to adjust their expectations about what their insurance will cost. Expectations that were formed during past years of declining prices and active competition must be set aside, as the reality of the current disrupted marketplace leads to significantly increased prices, reduced capacity, and possibly even unattractive terms and conditions.

Unfortunately, all of these things are happening at a time when the D&O insurance may be more important than ever. That is of course not a coincidence; the D&O insurance marketplace is disrupted precisely because the D&O insurers fully understand that the coming months could well be fraught with peril for their insureds.