June 5, 2020
June 5, 2020
The COVID-19 pandemic is a public health crisis that continues to threaten the safety of people in the United States and around the world. It’s also an unprecedented economic event, and companies and their boards are not immune from the risks it presents. Directors of public, private, and nonprofit organizations will face liability exposures during and after the pandemic that could trigger claims under directors and officers liability (D&O), employment practices liability (EPL), and wage and hour liability (W&H) insurance policies—which makes understanding such coverage more important than ever.
Since the World Health Organization declared COVID-19 a pandemic on March 11, 2020, we have seen a number of securities class action lawsuits filed against public companies and their directors and officers. To date, shareholder litigation related to COVID-19 has mainly taken the form of securities class action litigation, although there has been at least one derivative action filed. We have also seen a handful of US Securities and Exchange Commission actions filed against companies and at least one individual officer.
Despite the limited number of derivative actions to date, the possibility of an uptick in this type of litigation should be of great concern to directors. A drop in stock price is a prerequisite for a securities class action. But derivative litigation, which involves allegations of a director’s breach of fiduciary duties, can be filed without such a fall in stock price. Derivative settlements and judgments are not usually indemnifiable, making them particularly problematic as they may expose directors’ and officers’ personal assets if they do not have appropriate Side-A insurance coverage in place.
The global impact of the virus has brought a significant increase in supply-chain disruptions and a slowdown or complete halt of business operations in some industries, both of which can heighten insolvency risks. These impacts could thus lead to a company’s inability to fund the defense of its directors involved in company-related litigation, making D&O liability protection essential. Compared to public-company D&O policies, private- and nonprofit-organization D&O policies typically offer broader coverage. Depending on policy wording, the latter coverage could be triggered by pandemic-related claims from various stakeholders, including customers, vendors, and employees.
The pandemic’s extraordinary effect on workplaces could generate a variety of EPL and W&H claims. We expect plaintiffs’ counsel to advance novel legal theories under the Families First Coronavirus Response Act, the Family and Medical Leave Act, and the Americans with Disabilities Act, among other legislation, as employers struggle to comply with new and sometimes conflicting requirements under these and other employment laws.
History has shown that wrongful termination suits, discrimination suits, and other workplace litigation tend to follow on the heels of an economic downturn. Widespread layoffs, furloughs, and closures amid the pandemic will likely drive future claims. These claims could also be fueled by some new paid sick leave laws that include antidiscrimination and antiretaliation provisions, which prohibit employers from taking adverse action against employees who exercise their rights.
Businesses should also be mindful of potential claims that could arise in connection with managing remote workforces, including employee privacy and cyber claims. Directors and officers might be held personally liable for some alleged violations under wage and hour laws and state equivalents to the Worker Adjustment and Retraining Notification Act, which requires advance notice of plant or office closings.
Certain aspects of these and other types of workplace litigation claims could trigger EPL or W&H coverage, depending on the facts of the claim and policy wording.
It’s difficult to predict the next turn for businesses during the pandemic, but they must ready themselves for potential D&O, EPL, and W&H claims in the weeks and months ahead. Boards and management should work with their insurance advisors to understand how their coverage can apply and prepare to manage potential losses as the crisis continues to unfold.
Sarah Downey is a managing director and the D&O product leader at Marsh.
NACD: Tools and resources to help guide you in unpredictable times.