Directors and officers (D&O) liability insurance is coverage that protects corporate directors, officers and their spouses from personal losses should they be sued for actual or alleged wrongful acts in managing their company. This can cover legal fees, settlements, and other costs. D&O insurance is essentially the financial backing for a standard indemnification provision, a clause that protects officers from losses due to their role in a company.
Although it may seem like D&O insurance would apply only to public companies, any business with a corporate board or advisory committee (including private and nonprofit firms) can face D&O litigation risks.
D&O claims have grown since the start of the COVID-19 pandemic. One reason for this is companies’ inadequate safety precautions to keep their employees and customers safe from illness. Some examples of such cases include:
- A wrongful death suit involving Walmart. The suit alleged the retail giant failed to keep the store properly cleaned and disinfected, along with failing to promote social distancing, warn employees about the risks of COVID-19 and provide the employees with protective equipment. This lack of action on Walmart’s part allegedly resulted in the death of an employee who contracted the virus and died from COVID-19-associated complications.
- A similar wrongful death suit was filed against a cruise line company due to the death of a passenger who allegedly contracted the virus while aboard the company’s ship.
- Companies that have failed to comply with the Worker Adjustment and Retraining Notification (WARN) Act have also experienced legal issues since the pandemic began. In the case of business closures and layoffs, the WARN Act requires employers to “provide workers with sufficient time to prepare for the transition between jobs they currently hold and new jobs.” Some companies have faced class-action suits for allegedly using the pandemic as a justification to terminate employees on short notice.
- Legal claims may also result from employers failing to institute adequate health and safety policies and procedures once employees begin to return to the workplace.
Sales of securities can provide another basis for D&O claims. Some examples include:
- Shareholders have brought class actions against multiple companies (including two cruise lines) alleging that they downplayed or failed to inform the shareholders of the substantial impact of the pandemic on business.
- One animal supply company has been sued for decreased revenue, allegedly due to changes in its distribution channel during the pandemic.
- One recent lawsuit against a Canadian cannabis company alleges the firm defaulted on its obligations under certain debentures by failing to make interest payments due to the pandemic’s impact on the company.
- Shareholders sued another company for falsely stating it had developed a vaccine for COVID-19, which resulted in a deep decline in the company’s stock value.
Since the pandemic can have a significant impact on a company’s bottom line, directors and officers will continue to have broad liability exposure to shareholders, stakeholders, employees, and the government. There are various complex liability and coverage issues to consider, even once the pandemic has ended. Make sure you’re working with knowledgeable financial professionals to ensure you’re protected.
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