Introduction The coronavirus (COVID-19) outbreak has caused an unprecedented crisis in a very short period of time. Like every other sector of the global economy, the insurance industry has been, and will be, affected. This includes business interruption, event cancellation, life / personal accident, travel, trade credit, PI / IMI and D&O. Indeed, Lloyd’s is aiming to publish the preliminary loss estimate of COVID-19 in early May. In this article, we focus on D&O insurance with some high level observations and predictions, without intending to downplay the ongoing public health and economic emergencies. What follows is borne out of our experience that crises generally result in litigation. However, in light of the Australian Government’s monumental (and rolling) economic stimulus and relief package for businesses and employees, lenders offering moratoriums on pursuing unpaid loans and the community generally pulling together in these extraordinary times, it remains to be seen if the ripple effect will be as long lasting as the impact of the Global Financial Crisis. While this is an optimistic view and there are still many uncertainties / unknowns, having regard to the ongoing efforts, any period of downturn might (hopefully) be relatively short and the recovery might (again, hopefully) be sooner than anticipated. This should be aided with further legislative and industry intervention as the current crisis continues to evolve very quickly – only time will tell how long the pain will last. Securities claims The pandemic and resultant share market volatility will be fertile ground for securities class actions, given the ramifications for operating results and earnings / dividends guidance. Undoubtedly, ASX listed companies and their directors would be feeling very nervous with plunging share prices against the backdrop of their disclosure obligations. Companies such as Flight Centre and Qantas are seeing the decimation of their businesses. Administrators have already been appointed to Virgin Australia. This will continue and other businesses in unrelated sectors are facing the same challenges. While there are some reports of it already having started, D&O insurers should expect to soon receive notifications of circumstances that might give rise to securities claims. How could such a claim be framed in the current climate? We do not expect to see much change from the formulation of previous shareholder class actions, although the trigger for such claims (that is, a pathogen) has not been seen before. Specifically, plaintiff law firms and litigation funders might assert that companies and their boards should have promptly disclosed to the market matters such as (whether in combination or not): The impact of the pandemic on the business (including on customer demand, supply chain disruption and going concern considerations), the operating results and guidance statements. To name a few, GPT, Coca-Cola Amatil and Boral have already withdrawn earnings and/or dividend guidance. Further, given the uncertainty, it is possible that auditors might become more reluctant to issue unqualified audit reports, especially in relation to going concern considerations. If so, this will be ‘red flags’ for plaintiff law firms and funders searching for claims to fund and prosecute; The existence and exercise of force majeure clauses in contracts, and any reliance on the doctrine of frustration in contract law, which might see businesses pull out of commercial arrangements that have a material effect on revenue; and The effectiveness of business continuity and contingency plans in responding to and overcoming the crisis. We have already seen reports that a securities class action has been filed in the US against a cruise liner company on the basis that the investors purchased shares at prices that were artificially inflated, based on the company’s claims that it had taken measures to protect its guests and crew from this virus. No doubt there will be other ways in which securities claims are formulated with the wisdom of hindsight. It is a very difficult time for companies and their boards and senior management – do they make curative disclosures now, which might be viewed as too conservative and unnecessary in a few months’ time? Alternatively, do they ‘sit tight’ and let the dust settle before determining whether to make such a disclosure. The current prevailing view seems to be one of ‘disclosure now’, which should mean that any claim periods will be relatively short, given the speed at which the crisis has developed. Of course, this might make it uneconomic for funders to pursue claims for a small pool of investors who acquired shares in the December 2019 to February-March 2020 danger period. There might also be difficulties with claimants proving inflationary losses – in particular, how would an event study expert witness reliably assess and quantify the impact of any alleged counterfactual disclosures that a listed company ought to have made sooner amidst the extreme market turmoil? We also do not rule out government introducing safe harbour protections for companies facing class action risks in the current environment. In our experience, it has not been common to see specific virus or general pandemic type exclusions in D&O policies. However, D&O insurers will need to consider whether any such (or any other) exclusions might be applied, particularly if reinsurers are applying them. On the underwriting front, we anticipate that underwriters will be asking (in the immediate future) more detailed and specific questions about the ability of companies to respond to the crisis, the strength of their balance sheets, and their business readiness / continuity plans and the stress testing of those plans. Against the backdrop of the harder market and any pressure from reinsurers as outlined above, it remains to be seen if underwriters will be prepared to offer terms with or without the introduction of specific coronavirus (COVID-19) or general pandemic type exclusions. Lastly, to the extent that companies are engaging in capital raising activities, they might need to consider issuing a supplementary prospectus prior to listing. This might bring into play any fundraising related exclusions in D&O policies. Traditional D&O risks General duties As with the formulation of Side C claims, we foresee third party claimants (principally, liquidators) framing claims by reference to the general breaches of duties against directors under the common law and the Corporations Act 2001 (Cth). This could be done in multiple ways, including allegations that directors: mismanaged the company’s financial standing; and failed to put in place systems and procedures to deal (or adequately deal) with supply chain disruption, business continuity issues and cyber risks associated with staff working from home and so on. We address two specific risk areas below; these are not intended to be exhaustive. Insolvency & liquidity risks While the Australian Government has announced a relaxation of the insolvent trading regime and other interim relief for companies and their directors, it is inevitable that businesses will go under (and are already). In that context, liquidators will look to pursue directors and their policy limits. As a corollary, it is not uncommon for D&O policies to contain extensions for directors’ liabilities for the company’s unpaid tax liabilities and any penalties. In light of the current governmental response to the crisis, it is possible that tax collection and revenue agencies might face political pressure not to pursue directors for unpaid tax liabilities quickly or at all. Of course, governments might impose moratoriums on pursuing such claims while businesses recover. Also, as companies struggle financially, loan repayment obligations remain. Lenders might bring claims asserting that directors misrepresented the company’s financial position and/or compliance with financial covenants and liquidity considerations prior to the advancement of funds. While the banks might allow grace periods and loan deferral plans for struggling companies to get back on their feet, when companies fail, their financiers will be looking at recovery targets, including directors who have the benefit of an insurance policy. Of course, in a post Hayne world, the banks might also face political pressure not to pursue directors so quickly. Workplace safety & EPL risks This has the potential to be a ‘hot bed’ of activity. It is common for D&O policies to contain extensions for occupational health and safety prosecutions, and EPL related claims, against D&Os. Employers are responsible for the welfare of their workforce and the crisis gives rise to significant occupational health and safety considerations. Our general experience has been that employers have put in place systems to address the issues, which should mean there is less appetite for regulators to prosecute WHS / OHS breaches. In addition, businesses have stood down employees because their operations have been shut down pursuant to government directives. The consequences of standing a permanent employee down without lawful authority can be significant as such conduct can amount to a fundamental breach and ’constructive dismissal’ of the employment. (Our workplace law specialists have written several articles about employment law issues arising from the current COVID-19 crisis, including this practical guide for employer’s obligations and a summary of using stand down provisions within the workplace.) Conclusion Our comments above are a snapshot only and there are likely to be other D&O issues that arise from the current crisis that continues to evolve at a rapid pace. Needless to say, if they are not already, D&O insurers should expect to be busy with underwriting and claims issues associated with the COVID-19 outbreak. The above content is commentary rather than legal advice and was prepared on the basis of applicable legislation, government programs and initiatives that were in place as of the date of publication. Given the ongoing evolution of both the COVID-19 pandemic and frequent consequential changes to the various laws and programs within all Australian states and territories, readers should seek legal advice on the current situation as applicable to their specific circumstances before taking any action in relation to the above.
