Thursday, September 17, 2020

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Directors & Officers: Managing your risk in the COVID-19 climate

2020 has seen company Directors and Officers face unprecedented pressure to steer their organisations through the disruption and uncertainty of a global pandemic, all while carrying out their regular duties. Almost overnight, businesses have had to adjust to restrictions and rely on the robustness of their contingency plans. Importantly, the way a company responds to COVID-19 may subject its Directors and Officers to potential mismanagement claims or result in a breach of their duty to act with care and diligence under the Corporations Act 2001 (Cth).

While numerous claims have arisen from immediate financial loss, the volume of litigation claims is expected to increase as investigations start to examine how companies, Directors and Officers responded during the pandemic.

In this article, we outline some of the key exposures Management may face, actions you can take to mitigate the risk of lawsuits, and how the current conditions are impacting insurance coverage.

Risks for Directors and Officers

Australia is a highly regulated, litigious country with new legislation being enacted regularly. Even during these unprecedented times, the duties of Directors and Officers to comply with the law do not change. Directors and Officers need to be mindful of decisions made during this time that could result in claims from the following risks:

  • Poor Management response and planning
  • Disruption to supply chains, contracts and payment terms
  • Decline in revenue, fees, professional income, operating income and net income
  • Loan defaults and amendments or waivers in lending agreements
  • Non-disclosure of capital raising to insurers
  • Health and safety
  • Abidance of law and Compliance with regulatory requirements
  • Impact on contractual agreements
  • Disclosure to shareholders
  • Cyber security exposure i.e. higher cyber exposure with more staff working remotely

Management Liability (ML) and Director & Officers (D&O) policies are intended to protect individuals and the company from allegations that a Director or Officer committed a "wrongful act". If you are a Director or Officer and do not have an ML or D&O policy in place, we encourage you to reach out to your Honan Insurance Advisor to discuss this uninsured exposure.

Reducing risks from employee challenges

While Directors and Officers have adapted to restrictions and changed circumstances, the prevalence of claims related to employment practices are expected to rise. An insurance impact report by Wotton and Kearney predicted that employment practices liability (EPL) Insurers could face a higher risk of claims from employees who continue to work, rather than from people who are made redundant or stood down. Possible lawsuits and claims that could arise against companies, Directors and Officers may include:

  • Breach of Privacy or Defamation claims
  • Varying workplace policies
  • Inadequate or unfair policies addressing access to leave
  • Discrimination claims relating to health conditions
  • Failure to support sick employees
  • Harassment against employees who belong to a particular group
  • Whistle-blower claims

While there is a higher risk of claims, company Directors and Officers can reduce their exposure through the following actions:

  • Seek legal advice when updating policies and procedures
  • Obtain written consent from employees when reducing hours or remuneration
  • Offer tools and resources to employees to mitigate mental health risks and stress
  • Provide virtual safe work assessments
  • Maintain frequent communication with employees

Not all policies are the same and you should seek clarification from your advisor as to what would trigger a claim under your policy.

Rise in claims: The insurance market’s response

Prior to COVID-19, D&O insurers were already under pressure to achieve sustainable rates and reduce their insurance capacity following significant claims activity. This mainly impacted ASX listed businesses on traditional stand-alone D&O policies, however, it does have implications for private companies who purchase ML insurance.

ML insurance is a packaged policy, which combines traditional stand-alone covers such as Directors & Officers Liability, Corporate Liability, Employment Practices Liability (EPL), Statutory Liability, Crime Protection, Legal Expenses and Tax Audit.

The challenging economic environment has caused additional stress for ML and D&O insurers. While there is no consistent approach, insurers are taking longer to review submissions, and being more diligent and prudent in requesting detailed information about the impacts of COVID-19. In some cases, insurers are reducing their capacity under sections of ML policies (i.e. Crime/EPL) where they have seen a spike in claims. Others are imposing restrictions to coverage and some insurers are not prepared to underwrite risks for particular industry sectors heavily impacted by the pandemic.

With you all the way

We encourage Directors and Officers to reach out to Honan early to prepare for renewal and seek guidance on  identifying a claim or circumstance that could give rise to a claim. D&O and ML policies are written on a “claims made and notified” basis. This means a company, Director or Officer must notify their insurer of any known claim or any circumstance that could give rise to a claim before the policy period expires.

The D&O and ML insurance market is one of the most challenging policy classes. Honan have considerable experience and technical expertise in facilitating these types of placements. Please contact your Honan insurance advisor to discuss your situation and address any questions or concerns.

Monique Reibelt

Senior Client Executive - Professional and Executive Risks

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