The new coronavirus or COVID-19 has impacted businesses large and small, as well as the personal and financial lives of millions. Now, with so many aspects of our daily lives up in the air, insurance underwriters predict an oncoming wave of changes to director and officer (D&O) liability coverage will follow.
Understanding Directors and Officers (D&O) Liability
D&O liability refers to insurance coverage intended to protect the insured from personal losses if they are sued as a result of serving as a director or an officer of a business or other organization. In addition to paying for any resulting damages, this type of coverage can also cover for legal fees and other potential costs the organization may incur.
D&O liability insurance is similar to when a fiduciary duty is owed to shareholders and beneficiaries in that directors and officers are expected to hold the needs of the business first, over their own personal interests. Publicly traded companies are subject to greater federal regulation than privately held companies, particularly due to the Securities Act of 1933 and the Securities Exchange Act of 1934.
Directors and officers can be sued or held liable for a variety of reasons related to their company roles, including:
- Breach of fiduciary duty resulting in financial losses or bankruptcy
- Misrepresentation of company assets
- Misuse of company funds
- Fraud
- Failure to comply with workplace laws
- Theft of intellectual property and poaching of a competitor’s customers
- Lack of corporate governance
D&O Liability and COVID-19
With the ongoing pandemic, insurers have grown concerned over the heavy impact on business owners as well as the worsening economy. These concerns have led some carriers to move away from covering certain classes of business operations.
During the year prior to COVID-19, many carriers were left with no choice but to increase prices by as much as hundreds of percentage points and to reign in capacity. Among the biggest rises were D&O, commercial property, auto, and excess casualty insurance. Many companies affected by the economic fallout from the coronavirus have been forced to shut down completely or lay off staff. Businesses like these may be hit with a wave of D&O related litigation.
Insurance Policy Renewal Issues
Businesses owners need to prepare themselves for a difficult policy renewal year, including potentially broader exclusions for D&O liability. Insurance exclusions are policy provisions that eliminate coverage for certain types of risk. Exclusions ultimately narrow the scope of coverage provided. Insurers utilize exclusions to negate coverage for risks they are unwilling to insure. The new exclusions will likely be related to the coronavirus; and, if included, they will likely be incredibly broad due to the virus’s widespread effects.
Certain Industries Most Affected
While the potential changes in D&O liability are expected to affect industries across the board, the hospitality industry is anticipated to wind up taking the brunt of the impact. Airlines, hotels, casinos, cruise lines, movie theaters, restaurants, and bars are expected to be tremendously affected by these changes, while companies like Amazon will likely see a more positive impact. As impacts of the D&O slowdown spread, more bankruptcies are likely to be filed not just for stand-alone operations but for suppliers and vendors as well.
Houston Commercial Litigation Attorneys
COVID-19 has affected and will continue to affect businesses across varying industries in many different ways. As the effects become more apparent, further changes will likely be seen. At Feldman & Feldman, we understand the frustrations many business owners are dealing with during this unprecedented time. If your business’s D&O liability coverage has been affected by COVID-19, contact the experienced insurance litigation attorneys at Feldman & Feldman today.