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Businesses should brace themselves for a likely flood of shareholder suits related to the new coronavirus outbreak, but the success of any litigation may depend on companies’ willingness to fully disclose directors and officers liability-related risks now, say many experts.
In addition to D&O suits, commercial policyholders may face lawsuits and claims related to employment practices liability, cyber liability and workers compensation exposures stemming from COVID-19, the disease caused by the virus, which as of Monday had killed about 3,800 people globally.
Last week, the U.S. Securities and Exchange Commission directed companies to disclose information related to the coronavirus, which could have implications for D&O claims.
SEC Chairman Jay Clayton issued a statement saying companies must provide investors with assessments and plans for addressing material risks to their businesses and operations resulting from the coronavirus “to the fullest extent possible.”
“We all expect that we will see claims arising out of the virus in the D&O world, and we’re just watching to see when the first one comes in and what form it takes,” said Sarah Downey, New York-based FINPRO and D&O product leader for Marsh USA Inc.
In the past, widespread illnesses have not led to D&O litigation, said Kevin LaCroix, executive vice president of RT ProExec, a division of R-T Specialty LLC, in Beachwood, Ohio.
But over the past few years, D&O litigation in general has become “event driven,” focusing “on adverse events affecting company operations” rather than financial statements or false information, he said. “The unique thing about this particular health outbreak is the extent to which it is affecting the business operations of many companies,” he said.
“What this could mean is, there’s going to be companies adversely affected by this and that could, in this very volatile financial market, affect companies’ share price,” he said.
If investors feel they were not fully informed about supply chain vulnerabilities or distribution problems, they may file lawsuits, Mr. LaCroix said.
Laura Foggan, a partner with Crowell & Moring LLP in Washington and chair of the firm’s insurance/reinsurance group, said, “This is such an evolving situation, with so many unknowns, it creates a recipe for plaintiffs to think about future shareholder action.” If the situation does not develop as predicted in firms’ SEC filings it could result in D&O litigation, she said.
The success of litigation will depend on whether a company makes accurate disclosures, follows government recommendations, has emergency plans in place and has developed supply chain alternatives, said Susan Friedman, Plainview, New York-based vice president and claims counsel for NFP Corp.
Publicly held companies are “caught between a rock and a hard place” with the SEC requirement that they disclose an assessment of their plans for addressing the coronavirus and the material risks to their business, said Rob Yellen, New York-based executive vice president of Willis Towers Watson PLC’s FINEX North America practice. They do not have the benefit of safe harbors from liability with respect to what is happening today, he said.
“It’s really important not to say something that hasn’t been vetted” by legal counsel or auditors, Mr. Yellen said.
If shareholder suits are filed, D&O insurance should pay claims, Peter M. Gillon, a partner with Pillsbury Winthrop Shaw Pittman LLP in Washington, D.C., said in an email.
“Fortunately, such securities litigation falls well within the scope of typical D&O coverage, so most companies should be insured against the potential securities litigation risks,” he said.
“We are advising our clients to make sure they’re buying Side A limits,” said Christine Williams, New York-based chief executive officer, financial services group at Aon PLC. The Side A portion of a D&O policy offers coverage for individual directors and officers in shareholder actions.
In addition, companies should look at bodily injury exclusions, which are standard in D&O policies, and “make sure they narrow the exclusion as best they can,” Ms. Williams said.
Mr. Gillon said also that policyholders should be sure that if their D&O policy has some form of bodily injury exclusion that it does not apply to securities claims, if they are public, and that it does not preclude coverage for claims against directors and officers or otherwise limit coverage for these risks.
But the sharply declining stock market may muddy the issue of liability, said Thomas D. Cunningham, a partner with Sidley Austin LLP in Chicago who represents insurers.
“On balance, I think it’s going to have a more limited impact than people otherwise fear,” and “there will be more nuances in proving liability for damages.”
Priya Cherian Huskins, San Francisco-based senior vice president, D&O, for Woodruff Sawyer & Co., said she does not expect many coronavirus-related D&O claims because companies “with complex supply chain and other types of business that are most likely to be impacted by Covid-19 will tend to be companies whose boards will have thought about pandemics as one of many risk vectors they consider.”
Meanwhile, the coronavirus could affect other lines of coverage, too. Experts have previously pointed out that many commercial policyholders will likely make claims for supply chain-related losses resulting from the coronavirus outbreak
Other lines that may be hit include employment practices liability, if the crisis leads to discrimination against Asians; cyber insurance, if more employees working from home leads to greater vulnerability to hacking, phishing and other criminal scams because they are working on unsecured or less secure networks; and workers comp, if workers contract the illness in the workplace.
More insurance and risk management news on the coronavirus crisis here.