By Joseph P. Monteleone
The insurance industry is only beginning to see the legal implications of the global novel coronavirus crisis.
The disruptions in the U.S. due to the COVID-19 pandemic represent an evolving crisis. So this article, like so many others on COVID-19 insurance implications, can only be written in the context of expected claims and areas of potential coverage disputes.
Here I will focus on management liability insurance issues.
Although we are not yet aware of any coverage litigation, we have already begun to see claims against policyholders and insureds that clearly implicate D&O insurance.
Here are two important points to bear in mind:
A D&O policy may only provide coverage to individual directors and officers, as opposed to the corporate entity, and;
D&O policies clearly exclude coverage for bodily injury and property damage claims.
The paradigm D&O exposures have always been securities claims, which are typically defined broadly to include securities fraud claims arising under federal and state securities law and breach of fiduciary duty claims alleging mismanagement or failures in corporate governance. Under policies issued to public corporations, coverage for these securities claims is provided to the corporate entity and individual directors and officers. D&O policies issued to privately-held companies and not-for-profit organizations provide coverage to the entity even outside the realm of securities litigation, subject only to policy exclusions.
We have already seen two federal securities fraud suits involving failure to disclose or incomplete disclosure to investors, Douglas v. Norwegian Cruise Lines and McDermed v. Inovio Pharmaceuticals, Inc. Absent specific restrictions in the applicable insurance policies or something unusual in the pleadings, these actions potentially trigger the D&O policy. The second type of securities claim would typically be in the form of a shareholder derivative suit against directors and officers alleging mishandling of the COVID-19 crisis to the financial and reputational detriment of the corporation. We are not yet aware of any such suits, but unfortunately COVID-19 is a work in progress where the full extent of damage is yet to be determined.
Most D&O bodily injury and property damage exclusions are limited to claims for bodily injury or property damage, i.e., the claim must be brought by or on behalf of the person or entity allegedly sustaining injury or damage. Another version of these exclusions uses a preamble such as based upon or arising from. The latter language could imperil coverage for securities claims if they are based upon or arise from COVID-19 bodily injury or damage to physical property.
A similar analysis should take place with respect to pollution exclusions in these policies, although the policies rarely define the terms “pollution” or “pollutant” and many people do not think of COVID-19 as a “pollutant.”
Thus, the D&O policy is a potential source of insurance recovery for many securities claims that will undoubtedly ensue in the coming months. Further, the broader coverage under privately-held and not-for-profit D&O policies subjects these policies to claims outside the securities arena that may be brought by customers, vendors and governmental regulators.
This type of insurance, commonly known as representations and warranties insurance in the U.S., has been burgeoning over the past few years commensurate with the level of M&A activity.
The initial impact of COVID-19 on this market is likely to be a decrease in the number of polices purchased as M&A activity has begun to be impacted by the economic downturn caused by the impact of the virus.
The claims impact is less certain as there are few, if any, limitations in the policies that would address specifically a pandemic such as COVID-19. That may change as buyers attempt to obtain COVID-19 representations and warranties from the sellers in the market. Concomitantly, transactional risk insurers may seek to introduce COVID-19 exclusions in the policies. Otherwise, the supply chain and other disruptions to customer and vendor relationships could result in a number of covered claims.
All of this being said, COVID-19 claims under these policies may indeed be rare as the crisis was unknown until a few months ago and thus it would be difficult to establish a breach on the part of the selling entity.
This is a fluid area that bears watching in the months ahead, but currently the impact may be in terms of a reduction in M&A deals underlying the policies and whether or not the insurers endeavor to introduce specific COVID-19 exclusions.
It is an understatement to say that COVID-19 has already resulted in massive workplace disruptions in terms of both layoffs and employee illness.
The core coverage of the EPLI policy that may be impacted results from termination or retaliation in response to ill employees, including those who are only perceived to be ill. We may also see an uptick in racial and ethnic discrimination claims against employees who are blamed (albeit wrongly) to be a source of infection.
Many of these policies also provide a third-party cover in the form of insurance for claims brought by vendors or customers of the business. Again, there must be an underlying covered peril such as discrimination or harassment. However, like D&O policies, EPL policies do not cover bodily injury claims. Thus, there should be no coverage for a bodily injury claim brought by an employee, customer or vendor who becomes ill with the COVID-19 virus.
Rapidly evolving guidance
We have already seen COVID-19 coverage disputes in the area of business interruption. There are two other coverage areas that bear scrutiny.
First, there have been anecdotal reports of insurers attempting to restrict coverage for COVID-19 exposures in the middle of the policy term. Although we have not seen this phenomenon in the management liability arena, it should be noted that any mid-term restriction of coverage is likely a violation of basic contract law and contrary to industry custom and practice.
Second, there may be attempts by some states to mandate COVID-19 insurance coverage regardless of what the insurance policy provides. Currently, there is a bill in New Jersey, Assembly Bill 3844, that purports to do that in the area of business interruption coverage under first party property policies. This raises serious constitutional issues to say the least.
Joseph P. Monteleone is a partner in the Bedminster, New Jersey office of Weber Gallagher Simpson Stapleton Fires & Newby LLP. He practices primarily in the area of insurance coverage with a concentration in D&O and other management liability insurance policies.
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