What COVID-19 means for D&O insurance

Tebogo Leshilo, Executive Head of Complex Risks in the Financial Lines Sector

The rampant COVID-19 pandemic has caused a slowdown in world trade and has disrupted global supply chains as well as tourism flows, severely affecting a number of sectors.

According to a PwC study, some South African industries that have been adversely impacted include mobile operators, automotive manufacturers, as well as hospitality and retail establishments. Given that the pandemic is still unfolding, the full impact of the Coronavirus and the subsequent lockdown on company Directors and Officers (D&O) insurance is not yet clear in the South African context.

This is according to Tebogo Leshilo, Executive Head of Complex Risks in the Financial Lines Sector, at SHA Risk Specialists, who says that in markets such as the United States there is already evidence of a trend to hold directors and officers personally liable for losses arising out of the economic fallout caused by the pandemic.

She explains that the increase in D&O claims globally, will be further impacted by depressed financial markets, economic uncertainty and an increase in the number of companies facing financial distress and bankruptcy. “With the D&O market already characterised by increased rates and reduced capacity, the impact of COVID-19 was felt globally in the recent 01 July renewal season with increased scrutiny by insurers, further rate increases, and limitations and exclusions on coverage offered. This was driven by an increased cost of insurance and reinsurance capacity in light of rising litigation and settlement activity negatively impacting insurers’ profitability.”

Leshilo says that when companies return to work, management should be aware of certain protocols. “The newly gazetted regulations under South Africa’s Disaster Management Act introduce a new risk-adjusted strategy to manage the Coronavirus pandemic and set out various key requirements to be adhered to; the requirements differ based on the size of the workforce and sector involved.”

She explains that as more staff return to the workplace, the reintegration needs to be carefully managed in adherence to regulations regarding social distancing, employee gathering and hygiene practices to be followed by all staff, customers and contractors on the premises, so as to minimise the risk of exposure to the virus.

“There are additional factors to consider regarding the number of staff and public on the premises at any given time, rotation of working hours and shift systems, appropriate training and education of staff, use of sanitizers and disinfectants, monitoring and screening of staff, as well as reporting obligations related to employees diagnosed with, or exhibiting symptoms of COVID-19,” notes Leshilo.

She explains that a D&O policy may be triggered by claims where inappropriate decisions were made by management or where contingency planning measures were not satisfactory. “If a matter come to the attention of the company which they believe may result in allegations against its directors and officers, the insurer should be notified thereof as a precautionary measure.” It should be noted that policy response could be limited by exclusions pertaining to events such as COVID-19 so the directors would be well advised to familiarise themselves with the specifics of their D&O policy.

There is pressure on managerial teams to resume operations whilst adhering to the ever-changing regulatory landscape and alert levels as declared in the Disaster Management Act. According to Leshilo, this will be a test of the robustness of business continuity measures and contingency planning, and failings in execution could leave company directors exposed to investigations by the regulator as well as claims from multiple stakeholders.

Potential liability exposures company directors and officers face include:
• Allegations relating to mismanagement and failure to act or make disclosures in respect to the COVID-19 outbreak;
• Liability arising from cyber security and privacy issues particularly given the number of employees working remotely. The failure to protect a company’s network could leave the company vulnerable to cyberattacks, ransom demands, loss of company data and exposure of client data;
• Errors in business continuity planning and execution;
• Failure to purchase insurance against risks such as business interruption and cyber risks;
• Breach of contract with major customers and suppliers;
• Failure to manage the financial position and risk of financial distress;
• Failure to implement suitable health and safety practices;
• Failure in following the correct labour laws relating to employee relations.

“While all of the above liability exposures are not particular to any specific industry, the impact of COVID-19 has struck some sectors particularly heavily, namely the airline industry, travel, hospitality and entertainment as well as healthcare. It is possible that we may see a significant increase in D&O activity in these sectors,” adds Leshilo.

Given the uncertainty and challenges ahead in the wake of the COVID-19 pandemic, the impact of a D&O claim can be financially damaging for companies. This is largely due to the lack of internal resources in areas such as legal, compliance and human resources departments to support the directors in the event of allegations of wrongdoing made against them. Even if insurers have excluded COVID-19 related exposures there is tremendous value in purchasing a Directors and Officers policy, as the company is able to support its directors and officers in defending and settling a myriad of claims, allowing them to focus on the business of running the company knowing that their personal assets are protected.

The boards of any company would be well advised to chat to their insurance brokers to get a handle on this and other critical governance related exposures