Directors’ and Officers’ Liability and Covid-19

At least two Covid-19 related complaints against companies and management have already been made which may result in D&O claims. The first is a shareholder action against Norwegian Cruise Line Holdings Ltd alleging the company covered up the extent of the outbreak to protect bookings. The second is a shareholder action against Inovio Pharmaceuticals, Inc and its directors relating to a press release concerning the development of a Covid-19 vaccine.

Covid-19 can generate possible claims against companies and management in many ways.

We may start to see increased shareholder dissatisfaction as company values fall and dividends are suspended. This alone is not enough to warrant an action but failure to identify the risk to business, failure to disclose or failure to take adequate measures to mitigate may be. Regulators around the world are encouraging companies to disclose how Covid-19 may affect operations so companies are now identifying the virus as a risk factor in their regulatory filings. The method of mitigation will vary from business to business and industry to industry, but obvious examples are failure to utilize appropriate technology, failure to arrange alternative supply lines or failure to provide adequate customer support. Failure to prevent or deal with a cyber attack could also lead to claims from shareholders and this is a risk that is certainly increasing as criminals take advantage of companies working from home.

Claims can come from customers where contracts have not been fulfilled. Force majeure clauses could help mitigate this, but their interpretation is different in different countriesso cannot necessarily be relied upon. Customers can also claim if incorrect statements are made around the virus or the current situation although it is more likely that claims against the management in this respect will come from regulators or from shareholders (where the misstatement has caused significant financial impact to the company).

Loan defaults may create claims from banks and the failure of the company to survive the crisis will almost certainly cause claims from other creditors. Regulators around the world require firms to have adequate contingency plans so failure to do so could result in claims from shareholder and regulators. Regulator related claims can come from costs incurred in defending investigations into breaches of regulations such as health and safety or even failing to shut the business when ordered to do so.

Companies and management can also face claims from employees. Obvious examples are failure to provide adequate sanitation and hygienic working conditions or unfair dismissal where employees are laid off. Less obvious examples are discrimination towards infected employees, or failure to provide adequate alternative work arrangement, especially where staff are remunerated primarily by commission. Employees may allege that the company provided inadequate medical or insurance benefits if they suffer financially. These types of claim may fall under an Employment Practices Liability cover or a suitable extension to a D&O policy.

Generally D&O and EPL policies should cover liability arising out of Covid-19 related claims. However, some insurers have indicated that they will apply Corona or Covid-19 exclusions to their policies at renewal which would have the effect of excluding all cover where a claim arises out of infectious or contagious diseases. Brokers are resisting this, but any exclusion wording should be reviewed very carefully so that only specific, known circumstances are excluded and future diseases remain covered.