The risk of corporate insolvency is clearly one of the greatest overhang threats from the COVID-19 crisis for small and large companies alike.
I have already written about some of the practical steps which directors can take in order to avoid personal liability in the event of this unfortunate outcome for the companies on whose boards they sit. I have also examined some of the potential structural dangers of being left without cover which are associated with the fact that directors and officers liability insurance (“D&O”) is an annually renewable form of insurance protection. The good news is that safeguards can be built into many D&O programmes to minimise these risks.
But what should policyholders do if insurers seek to mount a full frontal attack on coverage by imposing express COVID-19 related exclusions in D&O policies as they come up for renewal?
Exclusionary Language
This is the text of a specimen London Market Association exclusion which first appeared in early March 2020:
“This Insurance does not cover any claim in any way caused by or resulting from:
a) Coronavirus disease (COVID-19);
b) Severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2);
c) any mutation or variation of SARS-CoV-2;
d) any fear or threat of a), b) or c) above.
LMA5391”
The Risks
On the face of it this may not seem unreasonable. After all, why should insurers pick up what they might characterise as a known risk? Surely insurance is only designed to cover unforeseen events? Whereas that reasoning might apply for example to medical, health or travel insurance in respect of which COVID-19 is indeed a known risk, does the same justification exist in liability policies where the trigger for cover is not the disease itself but negligence or other breach of duty? Here and in particular in D&O policies, there are a number of potential coverage concerns both for policyholders and for individual insureds.
- The introductory language for the exclusion is dangerously broad. The scope for argument as to whether a particular set of facts was in anyway caused by COVID-19 is considerable. If, for example, a company is already encountering entirely unrelated issues with profitability before the onset of COVID-19 but is tipped into a solvency crisis because of the economic fallout, would insurers deny the claim on the basis there was at least some causal connection? That risk cannot be ignored.
- Sub paragraph d) takes this concept even further and broadens out the exclusion so that it is limited not simply to COVID-19 itself but also to any fear or threat of it. On one view this could capture any action taken by a board in response to the fear or threat of COVID-19 which ends up in litigation. It is open to claimants, with the benefit of hindsight, to allege that the directors made any one of a number of wrong decisions in breach of their fiduciary duties. Why should D&O insurers not be willing to cover this risk?
- The extension of the exclusion under sub paragraph c) to any mutation or variation has the potential to extend the scope of the exclusion into uncharted and unforeseen areas and indefinitely.
Conclusion
It is a perhaps wrong to single out any particular form of COVID-19 exclusionary language. After all, the LMA version is only intended as a specimen and it is quite possible that insurers would be willing to negotiate variations. Equally, individual carriers may either come up with their own entirely different language or decide that no specific exclusionary language is necessary in relation to D&O insurance (while perhaps applying it to other lines). At this relatively early stage in the crisis it is too early to know how widespread the practice of imposing COVID-19 exclusions into D&O policies may become. That said given that the D&O insurance market was already challenged before this crisis, policyholders’ ability to reject the imposition of exclusions may be limited. If that turns out to be the case, it is really important that professional advisers ensure that their clients have a proper understanding of the impact of such restrictions. Armed with this knowledge, it may be possible to engineer alternative coverage solutions through the use of captives and/or by other means.
The contents of this publication, current at the date of publication set out above, are for reference purposes only and set out the views of the author. They do not constitute legal advice and should not be relied upon as such. Specific advice about your particular circumstances should always be sought separately before taking any action based on this publication.