COVID-19-Related Litigation Landscape and D&O Insurance

The coronavirus has taken its toll on businesses, workers, and the economy with the insurance industry at the center of quite a number of disputed cases, particularly with regard to business interruption losses. But over the last several months, we’ve also seen litigation impacting corporate directors and officers (D&O) – from securities class-action suits to derivative claims and a hotbed of other potential D&O claims down the road. Let’s take a look at what’s been happening and what may lie ahead.

Securities Class-Action Suits

Among the most significant D&O COVID-19-related claims so far is the rise in securities class-action lawsuits. One lawsuit filed early on in the pandemic involved Norwegian Cruise Lines, which alleged that the company downplayed the risk the virus posed to its customers. The complaint alleges that the defendants made false and misleading statements or failed to disclose that: “1) the company was employing sales tactics of providing customers with unproven and/or blatantly false statements about COVID-19 to entice customers to purchase cruises, thus endangering the lives of both their customers and crew members; and 2) as a result, defendants’ statements regarding the company’s business and operations were materially false and misleading and/or lacked a reasonable basis at all relevant times.”

Another COVID-19 securities class-action lawsuit involves Wells Fargo, which is being sued in connection with the government’s Paycheck Protection Program (PPP). The suit alleges that the financial institution allegedly made misrepresentations to investors in connection with the company’s participation in the PPP, including that “Wells Fargo planned to, and did, improperly allocate government-backed loans under PPP, and/or had inadequate controls in place to prevent such misallocation.”

Future securities claims against directors and officers could come from statements made about their companies’ financial condition as they re-open, their operating readiness and capabilities, their supply chain, cash and the ability to service debt or availability of credit, collectability of receivables, and levels of customer or product demand.

Shareholder Derivative Litigation

Shareholder derivative lawsuits related to the coronavirus have also been filed. One, in particular, involves video-conferencing company ZOOM, in which an investor alleges that all but one of the firm’s nine board members, as well as its chief financial officer, gave the investing public a “false impression of the company’s business, operations, and its cybersecurity.” The suit claims this all came to light when the pandemic fueled a surge in Zoom use and led many to question its data privacy and security measures. “The company has been substantially damaged as a result of the individual defendants’ knowing or highly reckless breaches of fiduciary duty and other misconduct,” the derivative suit alleges.

Government Enforcement Action

The United States Securities and Exchange Commission (SEC) has filed several coronavirus-related enforcement actions, alleging misrepresentations by or about companies pertaining to COVID-19 safety equipment and prevention products. For example, the SEC has brought an action against a specialty finance company regarding its allegedly false and misleading press releases claiming it was able to acquire and supply large quantities of N95 or similar masks to protect wearers from the COVID-19 virus.

More SEC enforcement is likely to come with the agency’s newly formed Coronavirus Steering Committee, designed to focus on fraud, insider trading, disclosure improprieties, and market-moving pronouncements relating to the pandemic.

Bankruptcy Claims

The pandemic could also bring on a surge in bankruptcies as companies have seen profits virtually disappear overnight. In fact, dozens of public companies have already filed bankruptcy. This trend could portend a wave of D&O claims filed against the directors and officers of the bankrupt companies by creditors or bankruptcy trustees.

Mismanagement Liability Claims

If a company fails to comply with employment-related rules and regulations, mismanagement liability claims could arise. As the impact of COVID-19 causes businesses to continue to take cost-saving measures such as layoffs, pay reductions, etc., D&O claims could potentially arise regarding any failure to comply with the Worker Adjustment and Retraining Notification (WARN) Act. The WARN Act imposes certain requirements on employers concerning closures and layoffs to “provide workers with sufficient time to prepare for the transition between the jobs they currently hold and new jobs,” such as by providing advance notice to employees of layoffs or closings.

COVID-19 Impact on D&O Insurance

The D&O insurance market was already tightening before the pandemic hit, with higher rates, diminished capacity, and the implementation of more conservative underwriting guidelines. COVID-19 has exacerbated what was already going on in the space, with some insurers adding  COVID-19 or communicable disease exclusions on renewal policies. In addition, most carriers are requesting detailed written questionnaires as part of the application process. They’re requesting companies to provide information on how the virus has impacted business operations, their workforce, and supply chain, as well as their financial condition, including liquidity and cash flow; credit availability, debt levels, and debt covenants; and reserves and collectability of receivables. Most industry experts feel that D&O claim-related losses due to COVID-19, including related defense costs, could be significant this year and heading into 2021. It’s important for you and your clients to review policies carefully (paying close attention to critical exclusions pertaining to bodily injury, property damage or personal injury; conditions; and definitions) to determine what coverage is available for COVID-19-related claims and issues. Whether a specific D&O policy will respond to a claim will depend on its language, the allegations and facts surrounding the lawsuit, and the corresponding jurisdiction’s laws.