Exclusions loom as D&O renewals impacted by pandemic

The coronavirus pandemic is further hardening the D&O market, which is beginning to apply more restrictive terms and conditions with Covid-19 exclusions on the horizon, according to brokers and insurers. The coronavirus outbreak is adding pressure to the D&O market, which had already hardened globally for more than 18 months ahead of the outbreak, according to Nicky Stokes, head of management liability and financial institutions at London market speciality liability broker New Dawn Risk. “What we are seeing now is almost unprecedented as D&O insurers impose more restrictions, cut capacity and look to push rates even further. Many D&O insurers are reserving their capacity for renewals, which translates into ever tougher conditions for new purchasers,” she told Commercial Risk Europe. Ms Stokes said the nature of renewal conversations has changed. “Insurers are asking different, more forward-looking questions around liquidity, business continuity and resilience plans, revenue forecasts, and their general preparedness to withstand a potential global recession. In certain classes of business, pandemic exclusions are popping up and while we haven't seen this in D&O yet, this is only a matter of time. When it does happen, it is likely that there will be a lot of pushback from buyers,” she warned. D&O insurers’ response to Covid-19 will vary between individual carriers, although some will impose broadly worded Covid-19 exclusions and/or insolvency exclusions, according to Catherina MacCabe, focus group leader for international management liability at Lloyd’s insurer Beazley. Others are likely to reduce capacity and increase retentions and premiums, she said. “Where exclusions are not being applied, more information will certainly be needed by underwriters. It is important that we communicate clearly to brokers about what extra information we need in the current climate, so that we and they can gain a clear view of the exposures through the new lens. It also helps to be able to offer flexibility in your D&O product offering at a time when insureds are re-examining their coverage needs,” Ms MacCabe told CRE. D&O insurers are adopting a more diligent underwriting approach, explained Joana Moniz, global head of commercial D&O and PI at Allianz Global Corporate and Specialty. They are asking clients Covid-19-related questions and reconsidering current terms and conditions, mainly for highly exposed industries, she told Commercial Risk Europe. “It is still too early to estimate the impact of such an unprecedented event on the D&O market. It depends on many variables, such as how long lockdown and social distancing measures last in the different countries and ultimately when the infection rates start improving and economies start recovering. It is however likely that many companies will go insolvent and litigation may increase,” she said. The D&O market is already starting to see some Covid-19 D&O claims coming through, according to Ms Stokes. The worst-affected industries are travel and retail. “Typically, stock market losses can lead to a wave of D&O claims, so we expect more to come,” she said. Big global stock market falls following the coronavirus outbreak are prompting some investors to sue companies and their directors. For example, a coronavirus-related securities class action lawsuit was filed against Norwegian Cruise Lines in March. Litigation is also expected from personal injury claims, while the heightened risk of cyberattacks could result in legal action against directors. It is too early to know the full extent of claims from Covid-19, but litigation and insolvency are likely to generate losses for the D&O market, according to Ms MacCabe. “In more litigious territories such as the US we are already seeing claims being filed, and we anticipate an increase in claims in other territories once the business world starts to return to some form of normality. Firms that are deemed to have fared worse than their peers may find their decisions and strategies come under the spotlight in the aftermath of Covid-19. Shareholders may seek some form of financial redress against boards of these firms,” she said. From a D&O perspective, the primary exposure will be linked to insolvencies, continued Ms MacCabe. Many sectors have been severely impacted by the lockdown, and a worldwide recession following the clampdown would add further financial pressure on companies already grappling with a twin demand-and-supply crunch, she said. “Many parties will pore over the books and harsh trading conditions may expose underlying financial mismanagement. Certainly, creditors will want to assess whether directors misrepresented the company’s position when raising debt. Regulatory bodies may wish to launch an investigation. Liquidators will want to understand how and why the company has gone bankrupt, particularly if competitors have fared better,” Ms MacCabe told CRE. “Other considerations will include whether management teams have been able to prepare and file their financial reports on time. Directors will need to consider if they have made appropriate financial disclosures across divisions and territories on the likely impact of Covid-19 on performance,” she continued. “As the dust settles after this pandemic however, struggling firms’ business continuity planning (BCP) is likely to come under scrutiny. If the board is found not to have contemplated a pandemic in its risk planning, or the BCP is found to have been inadequate or poorly executed, then D&O claims may follow. Factors such as supply chain dependencies that were not considered in the plan, or failure to purchase appropriate insurance, could be considered as director shortcomings,” she added. Directors and officers may be accused of failing to prepare but, in reality, corporate disaster planning rarely focuses on pandemics as a major threat, according to Ms Stokes. “We have not seen a pandemic on this scale for over a century. This raises a question of how mismanagement is defined in this case. Even the most profitable and cautious companies will not be unaffected. They may prepare for two or three months with no trading but is it realistic or reasonable to expect them to have anticipated that set of circumstances to endure for an unknown period of time? These decisions will play out in the courts and the industry will be watching developments with interest,” she said. As well as cases being brought against directors and officers by shareholders, there is also the threat of actions from employees who have lost their jobs at the outset of the outbreak, according to Ms Stokes. Suppliers and creditors are also going to be affected, she said. “It's likely we'll see a number of speculative and opportunistic claims, especially in the more litigious environments. Although these may not succeed, the costs incurred in defending these claims have the potential to be substantial,” said Ms Stokes.

Exclusions loom as D&O renewals impacted by pandemic

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