D&O insurance protects public corporations against securities claims and the costs of indemnifying directors and officers for liabilities that they may incur as a result of their service. Private company D&O insurance provides broader corporate coverage, which, subject to its exclusions, may insure a broader range of risks. And of course a key function of D&O insurance is to provide personal asset protection to directors and officers in situations where a company is unwilling or unable to indemnify against a liability claim. Over the greater part of the last decade, businesses seeking D&O coverage benefited from a soft market with the option to choose from multiple different carriers offering expanding coverage and decreasing premiums. An increase in regulatory investigations and securities litigation, coupled with the effect of emerging risks related to environmental issues and cyber vulnerabilities, as well as other event-driven liabilities, have caused capacity in the D&O market to shrink.
The current COVID-19 pandemic has amplified the recent strain on the D&O market. As a practical matter, everyone is struggling to adapt to a “new normal,” and many insurers and policyholders are facing a different work environment as many are working remotely for the first time. As a result, policyholders have experienced delayed responses and other problems obtaining renewal quotes. Further, purchasers are focused on running their businesses under new and ever changing state mandates pertaining to COVID-19 and have less time to devote to preparing for their renewal.
Apart from the practical difficulties arising from remote work, it is anticipated that underwriters will be challenged to value increased risks resulting from the pandemic. COVID-19 creates a greater risk of exposure to shareholder suits, particularly those surrounding a company’s disclosure of the financial impacts of COVID-19 on business. We have already seen several shareholder suits in the first half of 2020. Similarly, we may see an increase in regulatory investigations pertaining to SEC reporting requirements, as the SEC has already issued guidance encouraging companies to report how they plan to respond to COVID-19. Businesses may also face an increased risk of claims from employees and customers as businesses begin to reopen. And, as businesses face immense financial hardship as a result of the pandemic, there is an increased risk of insolvency, which can in turn lead to claims against directors and officers.
These increased risks have translated to higher prices for both purchasing and renewing D&O coverage. See “Quarterly D&O Pricing Index First Quarter 2020,” AON, at pg. 4 (reporting 100 percent price increases for primary policies renewing coverage at the same limit with the same deductible in the first quarter). However, there are several things companies nearing the renewal period can do to ensure they are getting the best coverage for the price.
Be Proactive: Start the renewal process as early as possible, and work with your broker and coverage counsel to identify your top priorities for the renewal cycle. Insurers may include questionnaires in the renewal applications pertaining to COVID-19 that may be long and burdensome for businesses to complete. These questionnaires may seek information regarding how a business is operated under stay-at-home orders, whether the business has experienced disruptions to supply chain affecting its ability to do business, and whether the business has had to implement furloughs or layoffs. Additional time also provides opportunities for companies to explore alternative insurance markets if the incumbent carrier’s renewal offer doesn’t meet current needs.
Analyze Changes in the Policy Form: Those beginning the renewal process should closely evaluate the policy form to fully understand all the limitations on coverage and to ensure that the policy is covering the appropriate risks. Be aware of the current trend for insurers to use the definitions section to insert additional policy exclusions and narrow coverage. We typically see this in the definitions of claims, loss, and defense costs. For example, a narrow definition of “claim” may only ensure coverage for lawsuits and administrative proceedings, but leave a business without coverage for regulatory investigations and requests to produce documents.
Policyholders should also closely examine policy exclusions to make sure that they are not so broad that they render coverage illusory. In the context of COVID-19, insurers may seek to expand their bodily injury, property damage, and pollution exclusions—and to add broad virus exclusions—that could impact coverage in the event of claims from shareholders or government regulators concerning a company’s response to the pandemic. Work closely with counsel to narrow these policy exclusions as much as possible. Also be aware of exclusions that may leave directors and officers without coverage in the event of insolvency, such as the “insured vs. insured” exclusion. This exclusion can be narrowed so as to maintain coverage for suits by a bankruptcy trustee or examiner.
Finally, as you are evaluating the scope of coverage, be mindful of emerging trends in D&O litigation. We have already seen shareholder derivative actions filed against companies such as Facebook and Oracle alleging that the directors and officers did not adequately address diversity and inclusion in their workplaces. Evaluate whether your policy protects against these risks. Will coverage extend to a company’s internal investigation or the cost of a public relations firm? Must the company satisfy a large self-insured retention before accessing the coverage And is the coverage sub-limited, at a level that effectively forces the company to self-finance the costs of any pre-suit investigation?
Consider Filing a Notice of Circumstances: If the renewal coverage is ultimately expected to be narrowed because of additional exclusions on coverage, consider filing a “notice of circumstances” prior to the renewal. Most D&O policies contain a “Notice of Circumstances” provision, which permits an insured to provide the insurer with notice of circumstances that may lead to a claim in the future such that any claim based on those circumstances will be covered under the policy period in which that the notice was filed. This is a strategic move that should be discussed with counsel, as filing a notice of circumstances may require detailed information about the future claim that may not be available at the time the notice of circumstances is prepared. The existence of the notice may also preclude coverage under the renewal policy unless the “prior notice” exclusion is appropriately narrowed.
Consider Self-Financing: For policyholders that are having difficulty finding capacity for their program, consider options such as captive insurance, co-insurance, and increasing the size of the self-insured retention, or some combination of these, in order to maintain sufficient protection at a reasonable cost. Also consider modifications to the program, such as increasing the amount of “Side-A” insurance, which protects the directors and officers against non-indemnified claims. Side-A coverage historically has been available at a lower cost, and with fewer exclusions, than D&O coverage protecting the company. If you do consider setting up a captive, it is necessary to work closely with counsel and your broker, and to understand applicable state corporate law. In particular, some states do not permit a captive insurer to insure claims that the corporation is prohibited from indemnifying.