Coronavirus (COVID-19): Know Your Insurance Coverage
Coronavirus (COVID-19): Know Your Insurance Coverage
Coronavirus–related litigation has already begun, and private and public investigations and litigation exploring the financial harm suffered by myriad companies and investors across many industries are likely to multiply manifold. Companies not already facing coronavirus-related litigation would be wise to take this opportunity to review their existing insurance coverages—likely purchased under very different economic circumstances—to make sure they know the scope of coverage and actions that will trigger coverage.
In our April 3, 2020 client alert, we focused on how existing and potential coronavirus-related litigation will test the scope of business interruption insurance. In this alert, we focus on coverage that most directly affects directors and officers: D&O insurance.
“D&O” policies apply in a wide variety of contexts, including securities class actions, shareholder derivative cases, and government investigations. An understanding of the kinds of claims for which you already have coverage—including the limits of that coverage and the circumstances under which it might apply—should inform many important decisions going forward, ranging from how to respond to threatened or actual litigation to how to work with insurers and brokers to maximize coverage, should the need arise.
As a threshold matter, companies should understand what actions will trigger coverage. The filing of a lawsuit, while often sufficient, is not always necessary. Events such as receiving a subpoena from a government agency or a demand letter signaling a potential shareholder derivative suit will almost certainly require companies to expend resources to defend, and policies vary considerably as to what triggers coverage for such expenditures. Prudence dictates promptly notifying insurers of any event that might reasonably be construed to trigger coverage to protect your rights under your applicable insurance policies.
D&O policies provide different kinds of coverage, which generally fall into four buckets, often referred to as “Side A,” “Side B,” “Side C,” and “Side D” coverage.
It is important to understand how the different “Sides” of your coverage interact with each other. For example, do you have dedicated Side A coverage? If you do, does that Side A coverage sit atop the other blended coverage, or is the Side A coverage held separately and available to the officers and directors from the outset? And under what circumstances does the Side A coverage kick in? Common triggers in such circumstances are exhaustion of blended coverage or a company’s inability to continue to indemnify officers and directors. Further, how does your coverage handle competing claims from different indemnitees? Who gets paid first in such circumstances? These are just a few of the many things to consider.
The scope of coverage provided by D&O policies differs significantly from one policy to the next. In fact, policies may differ from year-to-year, even from the same insurer, sometimes based on what coverage a particular insurer chose to offer the insured in a particular year and other times driven by what coverage the insured chose to purchase. Companies should, therefore, look at each of the policies in their insurance tower (and for each year of coverage) to determine what coverage is available and pay close attention to how different policies intersect.
Limits on the kinds of monetary awards for which a company may reimburse directors and officers is another factor to consider. For example, companies ordinarily may not reimburse directors and officers for awards or settlements in derivative cases, as in those cases the alleged harm caused by directors’ and/or officers’ misconduct is to the company itself. Consequently, directors and officers are more likely to look to insurers to cover exposure in such cases.
Some liability, such as that based on proven fraudulent conduct, will not be covered by any insurance policy. But even in that circumstance, the company and/or its insurer will likely need to advance defense costs until fraudulent conduct is proven, subject to an undertaking by the officers or directors to repay the advances in the event of any such findings. Companies examining what coverage they have for costs and potential liability stemming from future coronavirus-related litigation should, therefore, consider whether anticipated litigation will involve the kinds of claims applicable policies do not, or may not legally, cover.
Finally, coverage limits are not static. As new lawsuits or investigations trigger coverage over time, companies should revisit what coverage remains from existing policies to cover future matters. This is particularly important for D&O coverage, which is ordinarily provided through “claims made” policies, meaning the policy in force when a claim is filed will provide coverage, regardless of when the underlying events took place.
As noted above, the same allegedly misleading public disclosure might prompt a government investigation, a class action securities lawsuit, and a separate derivative lawsuit, perhaps preceded by a demand letter prompting an internal investigation. Companies should consider whether fighting similar battles on different fronts offers the chance for a coordinated effort that maximizes available coverage. In particular, if insureds intend to seek coverage for costs arising from multiple related disputes, they should consult their policies to determine what obligations they have to coordinate their defense before seeking coverage for potentially duplicative efforts.
Examining how different policy terms over multiple years combine to cover potential expenses or losses incurred through a potentially multifaceted legal fight is complicated. Such complexity not only underscores the importance of analyzing your potential coverage before disputes arise, but also highlights the value of an insurer with a sophisticated and experienced claims group to handle any claims that arise. Claims groups vary considerably in experience and sophistication.
Reviewing existing policies now offers insureds the best chance to determine how to gain the most benefit from existing coverage, explore whether multiple retentions exist for responding to multiple potential litigants, and examine what actions might trigger policies’ notice requirements for those different matters.
As the coronavirus continues to wreak havoc on businesses across industries, now is a good time to prepare for the kinds of direct and derivative litigation such an environment produces. Prudent planning requires an understanding of what coverage your company has for what kinds of exposure, the limits of that coverage, and the circumstances that may trigger such coverage.