by Rickard Jorgensen, FCII, ARM, ACIArb.
There has been a lot of news about the desire to obtain coverage for COViD-19 claims under a business interruption policy. The legal fights with insurers and proposed laws to retroactively secure coverage for various business are reported every week (see a recent article about a law proposed in Washington State here). Whether any of the proposed bills (in Louisiana, Massachusetts, New Jersey, New York, Ohio or any other States) will pass is not certain. But there may be other ways to find COVID-19 related coverage for your clients.
As part of the audit function CPAs are sometimes asked to verify the existence of Management Liability or Directors’ and Officers’ Liability Insurance [“D&O”]. But what about the responsiveness of this coverage for claims arising from the current pandemic?
A recent question raised about this D&O coverage is whether it will afford any protection for legal liability claims arising from COVID-19-related issues that result in financial and operational hardships.
There are a few articles available about this, but unless you are familiar with this type of coverage it is tough to follow, so I will distill it into something more readily understood.
Public Company D&O insurance will likely NOT afford coverage as claims usually arise from securities action.
Private Company D&O Insurance can provide protection (subject to the D&O policy’s individual wording) for losses for the following types of loss exposures associated with D&O liability which may include:
- Balancing the needs and priorities of key stakeholders.
- Fiduciary and other duties owed.
- Legal, financial and other external advisors may be overtaxed or unavailable due to COVID-19 related issues.
- Personnel layoffs, furloughs and operational adjustments.
- Regulatory and compliance uncertainty.
- Reputation risk arising from response to the pandemic.
- The adequacy and accuracy of disclosures in a changing financial and business environment.
What potential coverage is available via a client’s D&O coverage and how would a potential claim be considered?
A conventional Private company D&O policy provide broad coverage via three sections:
- coverage for non-indemnified D&O loss (Side A);
- indemnified D&O loss (Side B); and
- organizational loss, or “entity coverage” (Side C).
All three sections conventionally cover “loss” resulting from “claims” against an “insured” for a “wrongful act.” Using the conventional definitions of the terms above and subject to all other policy terms, conditions, exclusions and limitations, losses arising from a COVID-19 D&O claim would potentially be covered.
Additionally, a D&O policy may also provide coverage for costs associated with government investigations and regulatory inquiries which may result from a COVID-19 incident. It depends upon the D&O policy wording.
It should be understood that a D&O policy is not likely to address specific perils associated with a pandemic. However, most policies will provide coverage for traditional D&O perils arising from the management of a business. Even those perils triggered by COVID-19 events. This “silent COVID-19” coverage is “silent” because it does not expressly address pandemic perils, but it may not exclude them and therefore nevertheless provide coverage.
Coverage exclusion may be applied in unanticipated ways:
Most D&O policies exclude claims arising from Bodily Injury. The exclusion may limit coverage for direct losses (e.g. medial expenses) but there is no reason to assume that it would apply to indirect financial loss. However, if you client is healthcare related entity the exclusion may absolutely preclude coverage for claims “based upon, arising out of” a bodily injury.
The D&O policy may include an exclusion for pollution liability. This could include the dispersal of contaminants, which may encompass viruses or biological irritants.
The D&O policy may exclude intentional acts but add back defense coverage for lawsuits until a final appeal or adjudication deems the insured guilty. Even then, there may be innocent insured coverage.
Often D&O policies exclude losses “for” or “based upon, arising out of” acts or omissions in the rendering or failure to render professional services. Whether a COVID-19 claim would arise from this is unlikely unless an entity is in the healthcare business.
Other insurance policies may be triggered by a COVID-19 event such as environmental or general liability coverage. The wording of the other insurance clause in the D&O policy may impact how a D&O policy responds.
There may be first party coverages that will respond to a COVID-19 event. These could include:
Crisis Management – unless these coverage extensions offer payment of consulting expenses in dealing with a “crisis which could include resignations, plant closures or layoffs, recall of products or negative income announcement. Often there is a sub-limit to this coverage.
Reputation harm – adverse PR to the extent the reputation of the company or the management team is adversely impacted by a COVID-19 event. Again, a sub-limit will apply.
Business interruption – there is no coverage for first party business interruption or increased cost of working under a D&O policy. However, there may be coverage for third party management liability claims arising from a business shutdown or reduction.
Essential coverage for private companies
Claims under a D&O policy relating to COVID-19 risk may arises from a management team’s lack of mitigation efforts, preparedness or response measures.
Private D&O company policies may also provide insureds with more options in how claims are defended. Private company D&O policies may force the insurer to defend claims or, in other cases, may give the insured the option of defending itself or transferring that obligation to the insurer. Policies with an optional duty to defend feature generally provide a limited period in which insureds may tender that defense to the insurer before the option is lost.
Finally, a Private Company D&O policy may include certain additional exclusions pertaining to the Side C (Entity liability) coverage. For example a contractual liability exclusion, which in the context of COVID-19, may be relevant to alleged failures to fulfill contractual obligations due to disruptions in travel, product or services sourcing, and logistics; and employment practices exclusions, which may apply to claims relating to layoffs or other corporate actions impacting employees.
Of course, any of the foregoing comments are general and coverage depends upon the terms, conditions, exclusions and limitations of a specific D&O policy.
Regardless of the foregoing, it is prudent to suggest to your clients to review any D&O policy with their agent to identify coverage areas, and in addition, if your (CPA) firm has this type of management liability coverage, review this with your agent to see if there are any benefits that can be gained from your own policy.
Jorgensen & Company are not attorneys and do not offer any form of legal advice. Consult with appropriately qualified local counsel for more assistance. Rickard Jorgensen is President and Chief Underwriting Officer for the CPAGold™ program and may be contacted at (201) 345 2440 or firstname.lastname@example.org