Directors’ & Officers’ Liability & COVID-19
Directors’ and Officers’ Liability Insurance (D&O) covers the directors, officers and managers of a business against the risks associated with managing that business.
Upon the outbreak of Covid-19 most businesses have had to respond quickly in order to adapt to the new trading environment. At this point, Business Continuity Plans (BCP) will have come into action and leaders will have implemented measures to keep operations going and to protect the business as much as possible. The potential for third party claims, regulatory investigations and other exposures remains unclear.
So what can business leaders do now to protect both the business and its senior management?
Have you discussed your Business Continuity Plan (BCP) with your regulators, and if so, have you taken on board the regulator’s response? Has the regulator imposed any restrictions on you whilst operating under your alternative operating environment pursuant to the BCP?
The FCA recently communicated that all financial services firms should have a contingency plan in place to deal with Covid-19 (as with other major events). This should include the consideration of operational risks, the ability of firms to continue to operate effectively and the steps firms are taking to serve and support their customers.
Regulators are in general being proactive – be it by delaying non-critical regulatory interventions, such as cancellation of the banks’ 2020 annual stress test, or providing breathing room for firms to comply with regulatory requirements. Companies House, for example, is providing a three month extension for the filing of corporate accounts. However, this flexibility will have limitations. If there is a clear absence of business preparedness or continuity planning, that may result in regulatory investigations into the company and any relevant senior management or director functions.
Against that background, to protect the business it will be important to ensure that all evidence of how businesses are adapting in the face of the pandemic are recorded and communicated to regulators. Senior management will also need to focus on ensuring continued regulatory compliance and feedback during this time.
Business impact and disclosure considerations
Have you quantified the potential impact to your business (best and worst case) of the Covid-19 pandemic crisis?
The developing outbreak is ever-changing and moving quickly, making it difficult to quantify the potential impact to businesses. However, companies need to consider the influence it will have on employees, assets, supply-chains and customer engagement and then calculate the consequences. Failure to do so and to communicate that effectively and accurately risks claims by employees, by the company against its directors and/or by external third parties, particularly shareholders. Already we have seen litigation by shareholders in the United States against a company that over-promised in relation to their preparation of a vaccine, and the insurance market is braced for a significant increase in similar claims against companies and directors.
What plans have you put in place to mitigate any negative impact?
Both short and long-term plans should be implemented. McKinsey and Company outline seven immediate actions that can be drawn upon:
- Protect employees
- Set up a cross-functional response team
- Build a Business Continuity Plan
- Stabilise the supply-chain
- Keep in touch with customers
- Practice your plan
- Demonstrate purpose by supporting the epidemic efforts
How have your plans been disclosed to your shareholders? What has their feedback been? Do you anticipate a change in guidance?
Whilst remote working has been implemented across most businesses and all meetings face-to-face have been halted, it is still important to maintain an active dialogue and open communication to the fullest extent practical with shareholders. Anything communicated must be complete, accurate and not misleading.