Pandemic surge in bankruptcies complicates D&O underwritingPosted On: Nov. 17, 2020 7:00 AM CST
The pandemic-induced surge in bankruptcy filings is leading to more demands for information from directors and officers liability underwriters, experts say.
This was among the issues discussed by two panels at the Minneapolis-based Professional Liability Underwriting Society’s virtual conference last week.
There were six “mega” bankruptcy filings involving businesses with at least $1 billion in reported assets in this year’s first quarter, 31 in the second, and 15 in the third, for a total of 52, compared with a 2005-2019 quarterly average of five, according to a report by San Francisco-based Cornerstone Research Inc.
Mark Oakes, a partner with Norton Rose Fulbright US LLP in Austin, Texas, said a big red flag in bankruptcy proceedings is related party transactions in which, during the period leading up to bankruptcy, payments to related parties or affiliates are prioritized over those to creditors. These can be subject to various clawback provisions, he said.
Mr. Oakes also said defense costs “can go up very quickly” when there are multiple defense firms in D&O litigation.
Much depends on factors such as discovery and witnesses. “At the end of the day, our goal is to get our clients out of this and when you have several defense costs … that’s really not good for anybody, so it’s always a concern,” Mr. Oakes said.
Plaintiff attorney Craig Boneau, a partner with Reid Collins & Tsai in Austin, said, “Even from our perspective, there are logistical problems” with everyone having their own counsel.
“If you are trying to have a mediation and rational discussion,” it “gets very difficult if there are 12 law firms” all trying to represent their own clients and trying to make clear someone else was guilty of the wrongdoing, he said.
“Not only is there a significant waste of assets, but it just makes the whole logistical process much more complicated,” Mr. Boneau said.
Carrie O’Neal, senior vice president, legal and claims, for brokerage CAC Specialty in Boulder, Colorado, said that while there have been numerous articles about bankruptcy exclusions in D&O policies, the bottom line is, “Do we want to fight about something after the fact?”
It is incumbent upon the parties involved “to have these very frank conversations beforehand,” she said. “The fewer things we can fight about once we actually get a claim in, the better.”
During a session on D&O underwriting in an era of surging bankruptcies, Scott Williams, New York-based senior vice president, underwriting, at Chubb Ltd., said D&O “has been a tough line of business for years,” struggling even through periods of economic expansion.
“The great unknown” is how the line of business, and bankruptcy claims, will perform during a pandemic, he said, adding that this will not likely be known for years.
When the pandemic hit, companies were cut off from their liquidity sources, “leading to a ton” of bankruptcies in March, April and May, Mr. Williams said. The second guesses arising from those early business decisions “are already happening,” he said.
It is more important than ever “before we begin to underwrite, to try to identify those accounts” that have potential problems with their finances, he said.
Understanding a company’s business model and cash flow management “has never been more critical than it is today,” as is understanding whether a bankruptcy could turn into a claim, Mr. Williams said.
He added, “not all bankruptcies are created equal,” and it is important to “really dig through the company and understand its structure.”
Mr. Williams said obtaining timely information and understanding the business prior to renewal has become much more important than it was pre-pandemic.
Just understanding the credit relationships and status of financials is even more critical than it was before, he said.
Kristin Meilert, Unionville, New York-based vice president, management liability underwriting at TDC Special Underwriters, a subsidiary of The Doctors Co., which specializes in health care, said health care bankruptcies had generally been trending downward in 2019, but COVID-19 has turned everything upside down.
The pandemic has “definitely impacted the way we’re writing the business,” she said, adding TDC has been “asking some really specific questions over the last six months” to make sure there is a full picture.
Discussing obtaining coverage for companies that may be headed into bankruptcy, Rob Yellen, New York-based executive vice president of Willis Towers Watson PLC’s FINEX North America practice, said insurers want to know if a company is credible and a partner with whom they want to take this risk.
He said that while “pricing can get ridiculous,” a broker tries to “help both sides to understand” where things are coming from. The broker can sometimes come up with a structure to help companies get the coverage they need, rather than all the coverage they used to have, and help them get through the bankruptcy.
This can be challenging sometimes, Mr. Yellen said. For one account, for instance, he was able to get what a client “desperately needed,” if “not all the bells and whistles” the client wanted, he said.