How might the coronavirus impact the D&O insurance market?

Economic uncertainty and social inflation are two big concerns

How might the coronavirus impact the D&O insurance market?

Insurance News

By Bethan Moorcraft

The COVID-19 pandemic could potentially have a huge impact on directors & officers (D&O) liability insurance and other professional risks. As public and private companies fight to stay afloat amid plummeting economic conditions, they’re also being closely scrutinized by shareholders, employees and customers who are all too keen to hold corporations – especially big ones – to account. Companies will not be let off the hook just because there’s a global pandemic.

Coronavirus-related “event-driven” litigation and shareholder derivative suits have started to pick up steam in recent weeks, with two major securities suits filed in May against cruise ship line Carnival Corporation and biopharma company Sorrento Therapeutics.

The complaint filed in the U.S. District Court in Miami on behalf of a class of investors who purchased securities of the Carnival Corporation between January 28, 2020 and May 1, 2020, alleges that the cruise ship company “made a series of false and misleading statements and concealed material information” about its health and safety protocols and its alleged “role in facilitating the transmission of the virus”. Carnival has also been accused of “violating port of call regulations by concealing the amount and severity of COVID-19 infections on board its ships”.

Meanwhile, Sorrento Therapeutics and its officials have been accused of making misleading comments about a COVID-19 “cure”. The San Diego-based firm announced on May 15 that it had discovered an antibody that had “demonstrated 100% inhibition” of the coronavirus infection. Following that announcement, the company’s share price rose 281.7% by May 18. However, a reactionary report by Hindenburg Research described Sorrento’s claim as “sensational,” and by May 22, Sorrento company officials made a U-turn to stress that they had “potentially” found a cure. The firm’s share price then took a major dip and a plaintiff shareholder filed a securities class action lawsuit on behalf of investors who purchased the company’s securities between May 15 and May 22.

If these two high-profile cases involving large publicly-traded companies are anything to go by, the outlook for D&O insurers over the next 12-18 months is far from appealing – and that goes for both public and private companies. According to Heather Schaaf (pictured), Underwriting Director, Executive Liability at Burns & Wilcox, there could be many more lawsuits resulting from coronavirus-related issues filed against directors and officers in the coming months.

“The longer-term impacts of this will likely stem from the state of the economy, especially in the small private business sector,” Schaaf told Insurance Business. “Many small businesses have had to close their doors temporarily because of the coronavirus, and they lack the surplus of capital needed to sustain their operations through those mandatory closures. We’re seeing a lot of smaller retail businesses and restaurants suffering from economic hardships, which can lead to possible D&O lawsuits down the line. The larger publicly-traded companies will likely weather this storm a bit better because they have a higher surplus of capital to see them through. However, if they fail to weather the storm and they end up closing some of their operations, we anticipate that there could be an uptick in D&O lawsuits related to mismanagement.”

It is not unusual to see an uptick in D&O claims during a period of economic hardship or recession. If shareholders or tangential companies do not get the return on investment they signed up for, they will always look for retribution. At the start of the COVID-19 pandemic, stock prices took a steep dive, and while the market has rebounded to more positive straits, the country’s economic future remains uncertain. Even those companies who were less affected by the coronavirus and were able to stay open amid the pandemic face a heightened risk of D&O suits when the economy is under strain. 

Social inflation is another worry, Schaaf added. The US government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide emergency funding for small businesses struggling through the COVID-19 pandemic. With that federal assistance in place, people may expect the same type of reaction and support for commercial entities, she said.

“They’re going to expect that a company should have had some procedures in place, and some financial reserves to help get them through economic hardship. If they don’t, then the courts will likely look upon that negatively and the collective social inflation will happen in that juries will conclude companies should have been managed better and thus could seek much higher settlements in relation to that,” Schaaf explained. “Jurors view it as their responsibility, especially in the public D&O space, to hold companies to account. They expect larger companies to have good management in place and to have the proper conversations and plans in place before there is a virus outbreak or a financial crisis.”

In anticipation of social inflation impacting the severity of coronavirus-related D&O claims, insurance carriers have started to shore up their underwriting guidelines and protect their bottom lines by introducing higher premiums and retentions. They’re also introducing new exclusions upon renewals for things like financial insolvency, downsizing, and risks relating to virus or bacteria.

“I would advise agents not to expect a D&O insurance renewal to be flat,” said Schaaf. “I would expect there to be changes and would suggest they start working on the renewal 90 days out in order to stay ahead of it. They need to make sure the insured is using good practices and their financials are sound, and they need to transfer that information over to the carrier and the underwriter correctly, so that they can get the best possible terms for them. I also anticipate that accounts that may have been flat year-over-year are going to be marketed a lot more, so starting early on that renewal book will help agents keep those accounts.   

“What we’ve also seen in the renewal market is that it’s harder to get higher limits. An insured who used to get a $3 million limit might only be offered a $1 million limit by the same carrier at renewal, and it’s probably still going to be as expensive as the $3 million limit. I would encourage agents to let their insureds know that if they’re able to keep higher limits then they should, even though it’s going to be quite costly because of that tightening of the marketplace. Also, the way that D&O coverage is written as a claims-made form, if insureds reduce their limits now with the idea of increasing them again in a year or so, they’re going to start out with a new prior and pending date as of that new higher limit. That’s another reason why it’s important for them to keep the higher limits if they can.”

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