The COVID-19 pandemic poses serious threats to directors & officers claims frequency and severity. The insurance industry is publishing cautionary tales of claims activity than can arise post-pandemic. A recent Business Insurance webinar showcases directors & officers (D&O) experts, all relating cautionary steps to avoid regulatory and disclosure challenges that can trigger D&O claims. Anyone can listen to the informative webinar here.
We’ll cover tips from this webinar and offer some D&O risk management recommendations in this article.
Estimated Timeframe for the Rush of Directors & Officers Claims
According to one insurance expert, the SARS, MERS, or the Ebola outbreaks did not generate D&O claims against organizations and their directors. However, the coronavirus pandemic presents a very different scenario. A sharp drop in stock prices is much more likely than the previous epidemics to trigger allegations of mismanagement.
Shareholders recently filed security actions against Norwegian Cruise Lines alleging “misleading” business practices. To support this claim, the shareholders cited a press release that accompanied the Cruise Lines Form K-8 filed December 31, 2019. Litigants allege the statements in the press release and the 10-K were misleading. More claims of this nature will follow, many leading D&O experts believe.
Experts predict the next 36 months will show a significant increase in D&O claims from a variety of allegations. Additionally, as the economic fallout from coronavirus continues, the Business Insurance expert panel predicted a lack of D&O insurance capacity and sharply increasing D&O rates for “a sustained period.”
Allegations Arising in D&O Claims Post COVID-19
Here are some of the main allegations attorneys defending D&O claims predict in the coming months and years.
Alleged mismanagement over corporate decisions. These decisions will include selling assets, closing locations, selling companies, layoffs and other employment actions, suspending dividends and even the decision to file bankruptcy. Shareholders and private investors will question these decisions.
Insider trading allegations. The Securities and Exchange Commission (SEC) in mid-March reminded companies about insider trading. The SEC already targets both selling and buying, according to one expert. In response, executives should closely manage trading windows and when they open and close. Consult with counsel with any questions about trading windows. According to one expert, “The facts we’re facing create fear. This can lead to errors of negligence rather than intention. Fear can drive people to make bad decisions.” One attorney had even stronger advice. “There is no excuse for directors and officers of public companies, or several layers down from the C-suite, to be trading at this time. Shut down [trading] windows.”
Duty of oversight claims. The “Caremark standard” outlines the systems and controls directors must implement and monitor to avoid or defend against litigation. In Marchand v. Barnhill (Blue Bell Creameries), the court found the organization’s leadership failed to detail its discussion surrounding food safety and compliance even though its board met monthly.
Next, we’ll examines steps organizations can take to mitigate the risk of D&O claims.
Steps to Reduce Directors & Officers Claims
Both public and private organizations cannot expect to avoid all D&O claims in this turbulent time. However, experts agree that boards and officers can take steps to be better prepared to defend their actions if they find themselves embroiled in costly D&O litigation. According to attorneys who defend D&O claims, here are some measures organizations can take to prevent successful D&O claims.
Keep detailed meeting minutes. In the Marchand case against Blue Bell, “the board meetings [were] devoid of any suggestion that there was any regular discussion of food safety.” According to one D&O professional, “Directors must show documentary evidence that they are leading the charge on oversight.”
Moderate disclosures. As businesses return to a post-coronavirus routine, avoid overly optimistic public statements. When talking about cash flow, customers, the viability of accounts receivable, or facts regarding your supply chain, recognize that potential litigants will examine these statements. As highlighted in the Norwegian Cruise Lines case, any company communication, whether emails, prospectuses, or other documents, are a potential exhibit in litigation. Bad news and how you manage it will attract plaintiff lawyers. Don’t “soft pedal,” according to one expert. Avoid overly optimistic statements in press and financial statements. Statements such as your organization has the COVID-19 issue “under control” can be damaging in litigation, one expert warned.
Closely manage any appearance of insider trading. Battles with regulatory agencies are often the most difficult to defend, according to one attorney. Regulatory agencies have little incentive to settle. On March 23, 2020, the SEC issued a statement warning against insider trading. Remember that “every regulatory event is a potential media event,” according to one excellent book on crisis communication, Stop the Presses.
Update prior disclosures if they could appear misleading given today’s post-COVID-19 facts. The SEC provided guidance on March 25, 2020, regarding disclosures in light of the coronavirus. Take time to review your prior disclosures and update them given recent circumstances.
Pending D&O Claims May Be Ripe for Settlement
According to one attorney, litigants may be looking for money at this time, so insurers may be in a stronger position to settle aging D&O claims.
If you have unresolved D&O claims, contact your legal team and discuss scheduling a virtual mediation. Cases across the nation are transitioning swiftly from onsite mediation to virtual mediation, with surprisingly good results.
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