Companies can expect higher D&O rates, lower limits: Experts

Companies can expect higher directors and officers liability insurance rates, lower limits and more exclusions in their policies due to the coronavirus pandemic, experts say.

But they can minimize their risk by thoroughly documenting board meetings and avoiding, or withdrawing previously issued, overly optimistic guidance, advise these experts, who spoke Wednesday during a Business Insurance webinar on D&O risks from COVID-19.

The D&O market was “under tremendous stress” even before the pandemic because of the increase in securities class actions, large settlements and more litigation being filed in state courts, said Priya Cherian Huskins, San Francisco-based partner and senior vice president at broker Woodruff Sawyer & Co.

Kevin LaCroix, executive vice president of Beachwood, Ohio-based RT ProExec, a division of R-T Specialty LLC, said underwriters are introducing bankruptcy, pandemic-related and past actions exclusions in their policies, and are reluctant to write new business.

Limits are being reduced, Mr. LaCroix said. Companies that in the past had $10 million in limits are seeing them reduced to $5 million, and those with $5 million to $2.5 million, he said.

And sectors including airlines and hotels that had been regarded as “plain vanilla’ are now considered high risk because of the pandemic’s impact, he said.

It has also impacted assisted living facilities, which were already under significant pressure, he said

The disruption in the D&O market is likely to continue for some time and “continue to weigh on the D&O insurance marketplace,” while it is  unlikely new insurers will enter the market, Mr. LaCroix said.

More litigation can also be expected, the panel said. There has been a rise in event-driven litigation the past few years and “this is obviously a huge event,” said Mr. Lacroix, noting some pandemic-related lawsuits have already been filed.

The initial lawsuits are “going to be a harbinger of many more suits,” said William Passannante, New York-based shareholder and co-chair of the insurance recovery practice at Anderson Kill P.C. “I believe that plaintiff lawyers are highly creative,” he said.

However, Ms. Huskins said she doesn’t expect to see many lawsuits that are narrowly and directly related to the coronavirus.

Mr. Passannante said, “I do think that overly optimistic statements in press releases and financial statements are never a good idea.”

As companies reopen, they “clearly want to project confidence,” but overly optimistic statements about issues such as cash flow, supply chain and customer responses “are going to be scrutinized with prejudice” by plaintiff attorneys with 20-20 hindsight, Mr. LaCroix said.  Getting information out fully and efficiently without soft peddling is important, he said.
Ms. Huskins said companies should take a systemic approach to documenting internally the steps they are taking to understand the pandemic’s impact on their business over the short and long terms.

She said that while companies want to project confidence, there has never been a better time to withdraw guidance “and to say we don’t know,” which companies often are reluctant to do. This is a good time for companies to work with outside counsel and see what their peers are doing, she said.

To avoid ligation, insider trading should be shut down, and this prohibition should be enforced “several layers down, if not for everybody,” Ms. Huskins said. At this point, nobody needs an inquiry from a regulator or plaintiffs attorney on this issue, she said.

The panel also warned about fiduciary duty claims, pointing to the Delaware Supreme Court’s ruling last year in Jack L. Marchand II v. John W. Barnhill Jr. et al. that reinstated a D&O liability lawsuit tied to three people’s death from eating listeria-contaminated ice cream.

Pointing to that ruling, which affected a privately held company, Ms. Huskins said, “You don’t need a stock drop to get a breach of fiduciary lawsuit.” Equally important, she said, is what the case illustrates about the need for directors to have documentation of their risk oversight.

That ruling is particularly important because it is recent, it was a unanimous Delaware Supreme Court ruling, and because a central question was the safety of customers, employees and the public, Mr. Passannante said.

He also predicted that while 98.5% of litigation has been settled, the Marchand ruling “provides a path for defeating a motion to dismiss.”

Another concern is companies waiting too late to start the bankruptcy process, which is “more expensive than most people realize,” particularly for private companies, and can expose them to an enhanced risk of litigation, Ms. Huskins said.

Bankruptcy is a “fruitful source” of D&O claims, Mr. LaCroix said. Many companies for the first time ever are seeing their revenue suddenly drop to zero, with no one knowing how long this situation will last or how quickly they will be able to restore their revenue, while in the meantime bills need to be paid, he said.

Companies that were weak before “will see themselves tipped over into the bankruptcy process,” Mr. LaCroix said, noting expected bankruptcy filings by Neiman Marcus Group Inc. and J.C. Penney Co. Inc.

Speakers also discussed how in March, the U.S. Securities and Exchange Commission directed companies to disclose information related to the coronavirus.

Mr. LaCroix said that while it is important to pay attention to what the SEC has said about disclosure, because doing so means companies are less likely to attract plaintiff attention, there are “a lot of hard issues here.” These include what to do when it is learned the CEO has the coronavirus and supply chain information. Plaintiff attorneys, he said, will “have the benefit of hindsight” on these issues.

Wednesday’s webinar was moderated by Business Insurance editor Gavin Souter. A recording of the webinar can be accessed here.

More insurance and risk management news on the coronavirus crisis here.