Insight

D&O and Covid-19: An Update

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March 2021

In April 2020 we published a paper on the possible effects of the Covid-19 pandemic on the Directors’ and Officers’ insurance market. Our intention was to look at the areas where the pandemic may create claims and whether those claims would be covered by a standard D&O policy. (Click here to see our article).

In the intervening eleven months, we have not seen a dramatic rise in Covid-19 related claims but that is not to say that the exposure to D&O claims has reduced. At the same time, the D&O insurance market has changed. The market had started to harden even before the pandemic, but this has continued, and the pace of hardening has increased. How much of this is due to the pandemic is difficult to say.

A year ago, we felt that the main exposure to Covid-19 related claims on D&O policies came from the mismanagement of a firm in its response to the pandemic or to miscommunication with shareholders, customers or regulators. This exposure has not changed although firms have generally learned from experience and the worldwide nature of the pandemic means that their communication is now much more cautious. However, the longevity of the various lockdowns imposed around the world is likely to cause much deeper and possibly longer-lasting economic damage than was anticipated back in April 2020. Economic recessions impact D&O insurers as a high percentage of claims are driven originally from company insolvencies. At present, government subsidies and assistance schemes are providing a cushion to many businesses, but insurers anticipate an increase in the number of corporate failures and thus an increase in the number of actions brought against the directors and officers of those firms.

Insurers have therefore been responding in two ways.

The first is to increase premium rates. This has been occurring across the board, but some sectors have been harder hit than others as insurers adjust their appetites and allocations of capacity. Risks that have traditionally been regarded as high exposure, such as US-listed stocks or companies with challenged balance sheets have faced significant premium increases. Those with obvious Covid-19 related exposures such as hospitality, tourism or travel firms have also experienced difficulty in buying or renewing cover.

The second action taken by insurers is to impose coverage restrictions. The most obvious approach is where an insurer reduces the amount of capacity, they will provide by cutting a policy limit or the percentage of the risk they will accept. As insurers assess their appetite for certain industries or lines of business this can make it difficult to renew a policy with alternative insurers at similar terms to the expiring contract.

Another form of restriction is the imposition of policy exclusions. This may be through the use of specific Covid-19 exclusions or the use of broadly drafted bodily injury exclusions. A broadly drafted bodily injury exclusion can have the effect of excluding claims for other losses where there is a connection to an injury, which could include illness. There has been much discussion on the imposition of specific Covid-19 (or contagious disease) exclusions and whilst we have seen these being applied to other classes of insurance, we have yet to see them applied widely in the D&O market.

The impact of the pandemic has probably not yet been fully felt by the D&O market, but insurers are bracing themselves for a difficult period ahead. In the face of this, we recommend that clients approach their renewals as early as possible and allow enough time to prepare detailed information to assist their broker in presenting the risk to the market in the best possible light. Larger placements may require restructuring and in a time of reduced capacity and diminished appetites, this can be time-consuming, even after initial terms have been secured.