The Impacts of COVID-19 on D&O Insurance

The good news for the insurance market is that there have as yet been few cases of claims related to COVID-19 under D&O policies—liability insurance for directors and officers.

However, the scenario on the horizon is that claims from shareholders of employees connected to the pandemic will start to accumulate. Lower-than-planned financial performance could attract lawsuits from creditors. It’s not hard to imagine D&O claims against specific sectors from clients who have fallen ill or family members of people who have died.

”The insureds who are most exposed are still the directors and officers of companies that trade in the United States.”

While the market was already considered “hard” (with more rigid conditions imposed by insurers) for companies with exposure to US-based investors and to the class-action suits led there, there is a trend for even greater reticence by insurers. The US has already seen a few D&O claims directly connected to the pandemic.

The Phoenix Tree Holdings Limited case set the tone for this movement. The Chinese real-estate company trades on the NYSE; the class-action suit against the company alleges that the defendant did not properly present the real-estate demand in the Chinese market, nor its exposure to adverse events, especially in Wuhan (the city known as the epicenter of the coronavirus at the onset of the pandemic).

Firms specializing in class-action suits are anxiously awaiting the upcoming documentation to be released by publicly traded companies; they expect gaps in information about each company’s exposure to risks related to the pandemic, about the return to normal activities, or even about the capacity to generate cash for the payment of commitments that came due during the health crisis. Although the rate of litigation is higher in the US, it is essential that companies listed on the B3 also provide the necessary clarity to their investors. The growth in participation of individual investors in the Brazilian capital market, to a large extent driven by the drop in interests rates, calls for even more accountability in transparency of information released to the public.

But D&O insurance isn’t just for publicly traded companies. The adverse economic setting has seriously affected the payment capacity of companies of all types and sizes. While social media is calling for solidarity and understanding when it comes to unpaid commitments, unhappy creditors may believe that the pandemic is just an excuse for a failure to pay. That’s where everything from protests to lawsuits starts. And that’s not to mention the difficulty of resuming activities for companies that had just taken out loans or received a cash injection for the purposes of expansion. A company’s inability to pay could lead to civil suits against board members/officers for the debts in dispute.

The labor-rights discussion is a whole other subject. Many firms were compelled to ask employees to work from home as a solution to keep the business running. Many others had to reduce workers’ hours in the face of reduced demand. And still others had no other option but to do massive layoffs. Whatever the solution implemented by the company, there are possible labor disputes just waiting to be filed. While work-from-home situations make it difficult to manage employees or to verify hours worked, abruptly cutting salaries, or even employment relationships, put workers in tight spots to be taken up by their trade associations or by the Public Prosecutor’s Office. Decisions made by directors/officers could end up turning around on them in the form of lawsuits.

Whatever the solution implemented by the company, there are possible labor disputes just waiting to be filed. (…) the abrupt cutting of salaries, or even employment relationships, put workers in tight spots to be taken up by their trade associations or by the Public Prosecutor’s Office.

Finally, another topic of interest is client relations, which could have side effects on the directors/officers responsible for the operations that affected clients. Hospitals and health plans are the easiest example in the current context. However, retail companies that were forced to control clients’ access to their place of business could face the worst-case scenario of having their business licenses revoked. In this case, a claim against a director or officer would not come from a client, but would arise as a result of this relationship. As another example from this sector, claims for overpricing could also require directors/officers to defend themselves in court to prove that the increase was caused, in the strictest good faith, by suppliers that faced production challenges or by variations in exchange rates.