Advisen

Pandemic-related D&O litigation may focus on inadequate disclosure of risk: experts

By Erin Ayers, Advisen

Shareholder derivatives and securities class actions stemming from COVID-19 financial fallout have been slow in coming, but are starting to pick up pace and more will be on the horizon, according to experts speaking during a recent Advisen webinar.

“I’m not surprised we haven’t seen a huge run, but I do think it’s coming,” said Steve Prymas, vice president and specialty lines manager at Gen Re, during the webinar.

Cases collected in the Advisen large loss database with ties to the COVID-19 pandemic are “growing rapidly,” according to Jim Blinn, executive vice president of client solutions for Advisen, and moderator of the webinar. Lawsuits against Norwegian Cruise Lines, Inovio Pharmaceuticals, and the Zoom videoconference service offer a glimpse at the type of complaints that could give rise to directors and officers liability claims. Securities class actions and derivative shareholder suits also showed “real acceleration” in late April, Blinn said.

Where major D&O liability events have occurred in the past, it has been easier to identify
wrongful conduct that led to claims, panelists noted. The same may not be the case for pandemic-related claims, for which past D&O events may not be as illustrative.

“Here, the financial condition of our insureds is not driven by wrongful conduct but by the impact of a non-discriminating virus, clearly completely dissimilar. This virus is not something our insureds could have reasonably anticipated,” said Keith Lavigne, head of management and professional liability at Everest Insurance. Financial lines have also been secondary to other lines of insurance that address the direct impacts of the COVID-19 pandemic, but more lawsuits are likely to be on the way.

However, he added, plaintiffs will litigation hurdles in proving that stock losses have been “due solely attributable to some type of alleged misstatement and not to this worldwide pandemic.”

Instead, claimants may highlight lack of disclosure of risk, mitigation efforts, or faulty contingency plans on the part of firms.

“Inadequate disclosures may be a common allegation in lawsuits coming in the future,” said Lavigne.

He added, “Did their financial condition arise out of [COVID-19]? Was their guidance on point? What went wrong, was there mismanagement? That is the argument that plaintiffs are going to have to make when it comes to SCAs or derivatives.”

The rate of filings is something to watch, but the rate of dismissals will also bear watching, as judges decide whether the lawsuits are valid, said Jeffrey Lattmann, national executive liability practice leader for Beecher Carlson. Derivative litigation has risen in frequency and severity in recent years, with event-driven litigation becoming a significant concern for D&O underwriters.

Lavigne agreed, citing the high cost of litigation. “I think it’s reasonable to expect these types of claims to have a very long life,” he said.

Private companies will also see risk as they head back to work, citing retaliation claims from employees raising safety concerns, Lattmann noted, adding, “It’s a huge potential risk.”

Impact on insurance

As the pandemic began, the D&O insurance marketplace had seen primary pricing and tightening of capacity in response to severity and litigation. That tightening appears to have been enhanced over the last 35 to 40 days, Lattmann said.

“Anyone building substantial programs needs alternate strategies,” he explained. “The market’s just not opening up … whether COVID was here or not, it was moving that direction.”

Prymas said that the insurance industry already needed to increase rates based on adverse development -- now a recession and pandemic that hadn’t been priced for has created a “clash event” that will add volatility to loss ratios.

“The D&O market should be thinking long and hard about how to get adequate pricing for the loss costs that are invariably going to go up,” he said.

According to Lavigne, rates have been increasing since the second quarter of 2019 and should be expected to continue.

“Litigation costs have been increasing in the last 13 years. D&O rates have been decreasing. That doesn’t work. There’s some type of interception there that has to be corrected. This is a long-tailed business and as losses continue to be adverse and unfavorable and there’s development there, there’s rate need,” he said.

Lavigne added Everest expected to see a shift in coverage requests, with more buyers looking for Side A coverage, but many insureds with “incredible financial condition” are still seeking towers of full ABC coverage to protect their balance sheets.

“By doing so, you’re essentially diluting the availability of coverage solely for the Ds and Os and I find that surprising in this market and I expected that behavior to change,” he said, adding that directors and officers should be concerned especially as the number of lawsuits rise.

Lattmann explained that the buying process evaluates insureds’ comfort levels on retention, and some clients are showing more interest in Side A cover. In the last three or four months, he said, there has been more discussion and interest in construction of coverage than in a long time.

Panelists noted that pandemic exclusions have not been widely added in D&O policy language, but more underwriters are asking more questions, doing the due diligence to understand insureds’ finances and operations.

“What’s expected of companies for the underwriters to get comfort is a real understanding behind the scenes of what the operations are and to make sure that they explain how they’re managing the pandemic or any other element of risk,” said Lattmann. “Any kind of boilerplate answer” is not going to be accepted, he added.

Editor Erin Ayers can be reached at eayers@advisen.com.