How Has COVID-19 Impacted the D&O Insurance Market?

d&o insurance market

From its very beginning, the coronavirus pandemic has had a dramatic effect on the global economy. In the United States, businesses were forced to make difficult decisions, including shuttering operations and laying off workers. These decisions are often accompanied by emerging risk exposures. Risks associated with COVID-19 concerns have sparked concern within the directors & officers (D&O) insurance market. Scrutinizing operations in the hopes of holding corporations accountable for the weakened economy has meant that many large business owners are in the crosshairs – facing legal challenges that will have long-range impacts.

Litigation Against Corporate Interests

Lawsuits against corporations began in earnest in May, 2020. The first, a complaint by shareholders against cruise ship giant Carnival Corporation, alleged that the company had mislead investors about its responses to the coronavirus. The suit also alleges that Carnival had violated port authority regulations regarding the number and severity of COVID-19 infections on board its cruise ships. While D&O insurance is designed to protect businesses against lawsuits of this nature, high-profile litigation further interrupts operations as companies attempt to restore their economic prospects in the wake of the pandemic.

Sorrento Therapeutics was the target of another shareholder lawsuit. The California company had made an announcement that its research had uncovered an antibody effective against the novel coronavirus. As a result, the company’s share price skyrocketed, and investors clamored to purchase its securities. Soon after, another research organization claimed that Sorrento’s antibody claims as sensational, leading to a dramatic drop in share price. One of the shareholders who had purchased securities in May then filed a legal claim against the corporation.

A Tidal Wave of D&O Insurance Claims?

The Carnival and Sorrento lawsuits are only the tip of the litigation iceberg, according to insurance industry analysts. Many analysts expect numerous additional claims against both public and private corporations – claims that target the directors and officers of these businesses. Potential claims run the gamut from misleading or false statements that drove up stock prices and purchasing interest to financial mismanagement, failure to produce desirable investment returns, or mass layoffs that harm business operations.

Most concerning in the D&O insurance market is the government protections associated with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides emergency funding for smaller business operations in the United States. Shareholders may argue that larger, better-funded corporations should have had more robust financial procedures and reserves in place to protect against economic hardships. This perception of mismanagement may open the door to dozens, if not hundreds, of new legal challenges, potentially overrunning even the most comprehensive D&O insurance protections.

Insurance Carriers React

Faced with the prospect of covering a spate of D&O insurance claims, insurance carriers have tightened their underwriting guidelines. Many carriers have also raised premium costs, added COVID-related exclusions, and introduced higher retentions.

Insurance agents are being advised to be proactive with their business clients, encouraging them to share financial management and coronavirus response information long before policies reach renewal. By doing so, this can help lock in favorable premium rates for clients. It is also critical that agents convey any potential changes in the policy language, such as reduced limits or new exclusions related to financial management regarding the COVID-19 pandemic. For existing insureds with high limits, it is recommended that agents discourage companies from reducing their limits to save on premium expenses; this is particularly true for companies that have D&O insurance coverage written as a claims-made form. Failure to retain existing higher limits may result in staggering expenses down the road.

About U.S. Risk

U.S. Risk, LLC. is a wholesale broker and specialty lines underwriting manager providing a wide range of specialty insurance products and services. Headquartered in Dallas, Texas and operating 16 domestic and international branches, U.S. Risk and its affiliates would like to help you access a world of new markets and products. For more information, contact us today at (800) 232-5830.