Potential D&O Risks in the Wake of COVID-19

Businesses have been dealing with many different issues arising from the coronavirus pandemic, including exposures involving employee illnesses, event cancellations, business interruption and director’s and officer’s (D&O) liability risks.  While the full impact of COVID-19 is still unknown there are various potential D&O exposures of which businesses should be aware.

Public Companies Face Securities Class Actions Claims

D&O claims for public companies and to a lesser extent private companies will most likely involve securities class action or derivative suits, and stem from failure to disclose the impact of COVID-19. How directors and officers handled the coronavirus pandemic and if there was any mismanagement may also trigger potential claims for all types of businesses. 

For example, in March the first lawsuit was filed against Norwegian Cruise Line Holdings, Ltd. alleging the defendants made false and/or misleading statements and/or failed to disclose that: “(1) Norwegian was employing sales tactics in 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, the defendants’ statements regarding Norwegian’s business and operations were materially false and misleading and/or lacked a reasonable basis at all relevant times.”

Inovio Pharmaceuticals, Inc. is also facing a securities class action suit after it announced that it developed a COVID-19 vaccine “within three hours” and that its plan was to start trials in April 2020, according to The D&O Diary. As a result of the company’s statement, its shares “more than quadrupled” within a few trading days. After the SEC was called upon to investigate Inovio’s “ludicrous and dangerous claim that they designed a [COVID-19] vaccine in 3 hours,” the stock price dropped by 71% and shareholders suffered a $643 million loss of market capitalization.

D&O Risks for Community Associations

Community associations that manage developments have a duty to exercise due care for the safety of residents and guests in those areas under their control. As such, the board of directors of a community association could potentially face claims by members and guests who become infected, alleging that the association failed to exercise reasonable care in guarding against, or warning of, the risk of exposure to the COVID-19 virus.

According to the Community Associations Institute (CAI), it’s important to note that “during a pandemic emergency, an association cannot guarantee that the actions it takes will result in a common area totally clear of the virus, particularly when residents come and go on an ongoing basis.” A board should follow the expertise of the CDC and other government authorities to implement recommended strategies to minimize the spread of the disease and create as safe an environment as is reasonably possible.

Data Breach Exposures on the Rise

The failure of management to protect against and insure for privacy or cyber liabilities could potentially lead to D&O claims. With an increased reliance on remote working arrangements and IT infrastructure, organizations are more vulnerable to phishing and ransomware attacks by cyber criminals.

The board along with management should evaluate whether the company’s IT systems have enough capacity to support the growing virtual environment that COVID-19 has necessitated. They should assess whether proper cybersecurity measures, policies, and contingency plans are in place, and whether remote workers have the proper training to help mitigate risk. In addition, companies and their boards should be looking at whether their protocols and policies need to be updated as part of their fiduciary responsibility.

How D&O Liability insurance will respond to various COVID-19 exposures will depend on an insured’s specific policy and its exclusions. For example, in general D&O policies include exclusions for all claims of bodily injury, pollution liability and other risks, with wording varying among policies. It’s important to review with clients their policies and ensure that they are taking the appropriate risk management measures to mitigate losses.

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Sources: IBA, The D&O Diary, National Underwriter, Willis Towers Watson, JD Supra, Community Associations Institute