Recent moves by insurers to include broad Covid-19 exclusion clauses may have significant ramifications for the D&O sector
James Breese, senior associate at specialist law firm Fenchurch Law, has warned that the directors’ and officers’ (D&O) insurance sector faces a wide range of emerging risks, but these have to be set in the context of the Covid-19 pandemic.
He pointed to the Lloyd’s Market Association’s (LMA) clause wording 5391, which excludes losses caused by Covid-19 itself or the threat of the virus.
“There are some even wider clauses on the market around business interruption, but the LMA wording is incredibly wide,” he added. “It is hard to think of a broader form.
“Such a wording will cause problems and I am unsure as to what insurers have in mind with the inclusion of such a clause in a D&O policy.”
The concern, warned Breese, was that at present, Covid-19 could be deemed to have played a part in any company failure.
Throughout the pandemic, the government suspended the wrongful trading rules that are enacted if a director knowingly continued to trade while insolvent, in an effort to turn the company’s fortunes around.
That suspension will come to an end in May and Breese fears that it may trigger a number of firms filing for liquidation.
“A company director may have said in 2020 they saw some trading difficulties due to Covid, but believed that [the] company could continue,” he explained. “However, [when] the wrongful trading rules are reinstated, the firm ceases to trade and the director is sued.
“The failure could be deemed to be because of Covid and therefore presents a technical defence for the insurer given the exclusion clause.”
Impact of exclusions
Breese added there was growing concern that with insurers placing such exclusions in their D&O cover, it could create issues around what insurers believe or attribute to be the cause of claims – this, in turn, influences whether an exclusion can be applied and if a claim is rejected or accepted.
“Brexit has been completed but it has taken a backseat to Covid,” he explained. “There are many businesses and customers which have suffered from the late delivery of goods due to the transportation delays. Here again is a case in point as to whether the delay was caused by additional red tape from Brexit or the impact of Covid.
“There may well be an interplay between both and, as such, insurers could point to Brexit, Covid or both and again open the door for the Covid exclusion to be use as a defence.”
“We are now living in a world defined by Covid and the issues we see may well be both immediate and in the short-term,” added Breese. “However, they need to be recognised.”
New breed of liabilities
In terms of the threat from silent cyber, Breese said there was a recognition that should a cyber attack occur, directors may face claims around the failure to ensure that adequate security systems were in place. A breach or theft of data could leave directors open to charges of data regulatory breaches.Breese also warned that emerging threats will provide a challenge for firms and their directors. Climate change and silent cyber, for example, threaten to create a new breed of D&O liabilities.
The problem, however, is that cyber is all too often excluded from D&O policies, leaving directors having to ensure they have specific cyber coverage.
Furthermore, the ongoing demand for greater sustainability in companies of all shapes and sizes will become a major issue for directors, warned Breese.
He pointed to last year’s annual general meeting at banking giant Barclays, where 20% of shareholders voted for the bank to cease support for any firms which derived the majority of its revenues from fossil fuels.
“Regulators are keen to see companies deliver greater sustainability and want to see directors take greater ownership for those efforts,” explained Breese. “It has the potential to become more of a challenge to directors than Covid.
“There is a demand for greater personal accountability from directors. Regulators have been keen to increase directors’ personal responsibilities. The Senior Management and Certification Regime (SMCR) is a case in point.”
Notifying claims correctly
While Breese said the value of D&O insurance cover could not be underestimated, cover continues to narrow and premiums continue to rise as insurers look to reduce their exposures.
“The risks are growing for directors and managers who have any managerial and supervisory responsibilities,” he explained.
“The problem we face at present is that there is not much that we can do to prevent these claims given the current market.”
He added that despite the fact that the ability to stop claims was constrained, there were steps that firms and its directors could take to mitigate them
“Directors and companies are encouraged to stop and think about the decisions they make,” he added. “The notification of claims, when they occur, is important.
“If you make the notification document too broad, then you could present your insurer with an easy link to their exclusion clause.
“You need to be clear as to the cause of the action that has resulted in the claim that has been made to ensure there is every likelihood that your D&O cover will respond.”