Covid-linked D&O claims are ‘a significant area for focus’ – Fenchurch Law

Following on from business interruption (BI) claim disputes arising from the Covid-19 pandemic, directors’ and officers’ (D&O) claims are going to be “a significant area for focus”, especially as the coronavirus-caused economic downturn will most likely lead to increased insolvencies, said Aaron Le Marquer, partner at Fenchurch Law.

Speaking at the law firm’s Virtual Coverage Symposium event on Tuesday 8 December, Le Marquer explained that the majority of UK D&O claims tend to be linked to business insolvencies and although there is “a temporary suspension of wrongful trading laws, which will give directors some relief from claims against them for wrongful trading at least”, there are still other claims that can directors are likely to face in the current climate.

He said: “What we have is a lot of insolvency – that’s where claims tend to come in a D&O context in the UK.

”In one statistic, UK insolvencies are predicted to increase by 43% next year and that’s certainly realistic given what we’ve seen. There will be big insolvencies and small insolvencies.

“Potential claims will remain against the directors. Fraudulent trading, which is similar to wrongful trading but requires some kind of wrongful intent, intent to deceive.

“General misfeasance and general breach of fiduciary duty claims will remain against directors and we can be sure that where there are insolvencies, liquidators and other parties will be examining with a fine toothcomb any potential claims against those directors which might engage D&O policy limits.”

Le Marquer added that coverage disputes may occur here as a result of coronavirus exclusions being included in policy wordings, for example the LMA5391 clause published by the Lloyd’s Market Association in March.

“This is not unique to D&O, but it’s particular relevant to D&O,” he explained.

“We’ve seen coronavirus exclusions being applied to the policy. It excludes any claim in any way caused by or resulting from [the pandemic], so not necessarily proximately caused by, but any kind of causal link there, coronavirus disease, the virus itself, any mutations thereof and any fear or threat of [the above].

”And that’s going to be difficult for D&O policyholders and third parties seeking coverage under D&O policies, particularly in the insolvency context.

“A lot of the claims will be brought against directors, or allegations made against directors in an insolvency context and the allegations themselves won’t arise out of coronavirus disease or fear/threat thereof, but the insolvency may well be justifiably alleged to have arisen out of Covid-19.

“And in the current environment, any insolvency which comes along, of course, this exclusion gives insurers an exclusion to rely on in seeking to argue that Covid-19 has been a causal factor in the claim, even if the proximate cause was not Covid-19 itself.

”We see this exclusion causing some significant problems a bit further down the line.”

Potential coverage

Other insurance products that may indirectly provide coverage – or lead to coverage disputes – for Covid-19-related claims include professional indemnity, if policyholders wish to bring claims against their broker, trade credit insurance and political risk cover.

In terms of trade credit and political risk insurances, Le Marquer added that these are often sold together as a package.

Due to the similarities between the two products, Le Marquer continued that there could be potential overlaps in cover, or gaps in cover, which could then lead to insurers debating who actually needs to pay any claims or in claims falling between the cracks in the two policy wordings.

There is also product liability and recall insurance, which may have relevance for Covid-19 claims.

For example, product liability cover could be applied if a hand sanitiser has an unwanted side effect, such as causing a skin condition. The same could be true for potential coronavirus vaccines once rolled out.

Personal protective equipment (PPE) could also fall into this category, for example if it doesn’t meet regulatory standards and does not sufficiently protect wearers.

Unattractive position

In terms of policies that could provide direct cover for coronavirus losses, dependent on specific policy wordings, Le Marquer listed event cancellation cover, business interruption (BI) insurance, employers’ liability, public liability and environmental policies.

In terms of event cancellation policies, Le Marquer noted that although communicable diseases are mainly excluded, many policyholders take a buy back option for this.

He added that some insurers attempted to refuse event cancellation claims for events that were cancelled prior to official government orders, yet he believes this is viewed as “an unattractive position for insurers” considering how the pandemic and associated lockdowns have developed over the course of the year.

Some event cancellation policies also have a SARS exclusion – Le Marquer said that a number of insurers tried to argue that Covid-19 is a mutation of SARS and another type of the disease, meaning coverage is excluded, however Le Marquer cited that scientific evidence proves that coronavirus is related to SARS rather than a specific strand of it.

Environmental policies may offer cover too, despite their bespoke nature, Le Marquer continued – some contain cover for a “biological contaminant”, which policyholders could argue Covid-19 is. However, these policies vary widely and not all industries will have them.