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Executive Risk Considerations

Learn more about executive risk considerations

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ROBERT REGUEIRO: Hello. This is Robert Regueiro at McGriff, Senior Vice President and part of the Executive Risk Advisor Division. As the world reacts to news of coronavirus spreading throughout the globe, financial markets are tumbling amid the economic uncertainty. Disruption in supply chains and market demand has created volatility in share prices with certain industries taking a bigger hit than others.

The airline and cruise industry, for example, have experienced a drastic fall in consumer demand as a result of travel restrictions and social distancing. Retail and hospitality industries are also expected to take a financial hit as a result of health officials encouraging businesses to close and individuals to stay home. Additionally, and as a result of price wars between Saudi Arabia and Russia, as well as an outlook that includes decreasing demand, the oil and gas industry is undergoing an extremely tough market with the price of oil well below $30.

During this uncertainty, companies are evaluating all insurance policies to assess whether or not coverage could apply to the losses they expect to experience. Though the devil's in the details and how claims take shape and form is still unknown, we wanted to provide everyone with some things to think through as it relates to executive risk policies.

First, we'll dive through directors' and officers' liability marketplace, identifying regulatory environment, litigation landscape, and reviewing your policy to see how coverage could apply. Additionally, we'll go through other executive risk policies to see how those policies can be impacted as well. To understand the current environment from a regulatory standpoint, it is important to know that agency statements on appropriate disclosures for coronavirus-related risks. As early as January 2020, the SEC recognized that though the potential effects of coronavirus are difficult to assess or predict with meaningful precision, if and how companies respond to events as they unfold can be material to an investment decision. As a result of such statement from the SEC, over 600 companies specifically mentioned coronavirus as a risk factor in the public disclosures as of the end of February.

As companies grappled with whether or not to disclose additional coronavirus-related risk factors, management should also consider how much detail should be provided. The SEC encourages companies to go beyond standard risk factor language and be specific to the overall potential impact. As the coronavirus crisis continues to evolve on a daily basis, what a company says or doesn't say could result in heightened scrutiny by investors, potentially leading to litigation. We've already seen litigation as a result of a company saying the wrong thing and another company saying too little.

Finally, to allow companies time to evaluate whether to disclose coronavirus-related risk factors, the SEC has advised companies that they will have an additional 45 days to file certain matters otherwise due between March 1 and April 30. This could include year-end financials for companies with different financial calendars and 8-Ks for notable events.

From a litigation environment, companies have seen the likelihood of securities class action litigation rise the past few years to 8.9% in 2019. The likelihood percentage falls to 5.5% if merger objection lawsuits are removed. The increased litigation likelihood is as a result of a large number of securities class action filings against the diminishing number of publicly-traded companies.

In 2019, there were 428 securities class action filings. Taking a closer look into the filings, we can extract a number of trends. One of those trends is what has been commonly referred to as event-driven litigation. As opposed to more common securities class filings alleging accounting improprieties or financial misrepresentation, in event-driven litigation, a lawsuit's alleging a company misrepresented and misled investors by making inaccurate statements about the risk of a major negative event. Most often these lawsuits are operational in nature as opposed to financial.

Recent events that have resulted in securities class action filings include the opioid crisis, the MeToo movement, and cyber-related breaches. Many fear that coronavirus-related events could impact—negatively impact a company's operations or financials, causing shares to drop even further and sparking litigation that keeps up with the event-driven litigation trend we've already seen. As previously mentioned, the SEC's continue to focus on coronavirus-related disclosures could trip up companies and invite litigation.

As of March 17, there have been two coronavirus-related securities class action filed-- one against a cruise line company, and the other against a pharmaceutical company. One of those lawsuits alleged the company misrepresented customers by stating booked revenue remained ahead of the prior year on a comparable basis despite the current known impact a coronavirus on the company and the industry. The other lawsuit alleged the company misled investors by misstating the company had developed to COVID-19 vaccine in a matter of hours. Though the allegations are very different, both point to the importance of disclosing and reporting coronavirus-related risks in a well-thought-through manner.

D&O policies and most all executive risk policies are not designed to provide coverage to law as a direct result of bodily injury, including sickness, disease, or death of a person. However, it is important to note that D&O policies are all risks policies not requiring a named peril to trigger the policy. The policy is purposefully written and intended to be broad in scope, extending to any alleged breach of duty made by an insurance company or injured person, subject, of course, to the terms and conditions of the policy.

Within those terms and conditions of the traditional D&O policy is commonly a bodily injury or property damage exclusion precluding claims for bodily injury, sickness, mental anguish, emotional distress, disease, or death of any person. How that exclusion is worded is extremely important. Some exclusionary language includes absolute lead-in language precluding claims based upon, arising out of, or in any way related to such bodily injury. Other exclusionary language may have a more simplified and pointed lead-in language that would simply preclude claims for bodily injury. We recommend insureds review this specifically lead-in language to BIPD exclusion.

Additionally, though the [INAUDIBLE] lead-in language is typically thought of as providing coverage for securities claims, we recommend insureds review whether or not a securities claim exception or carve-back to the exclusion is included in the policy. Having these wordings within the exclusion could mean a difference in having a coronavirus-related claim excluded.

It is important to note that in the event of a non-indemnifiable claim against the director or officer, there could be coverage under the Side A only difference in conditions policies, as most Side A DIC policies do not contain a BIPD exclusion. Cited claims from the coronavirus event could include a derivative claim in which the entity bring suit against individual directors and officers for breaches of fiduciary duty with respect to crisis mismanagement.

In addition to securities claim coverage within the traditional D&O policy, and depending on how a claim might be brought, a number of sublimited coverage could apply to certain costs incurred by the company, including crisis or special event coverage. For these companies whose share price has fallen over a certain threshold, generally 10% to 25% or $5 per share within 24 hours, there may be coverage for public relations, crisis management, or law firm expenses related to a crisis event. Events that may trigger a material impact on share price include a restatement of financials, elimination or suspension of the dividend, write off of assets, bankruptcy, and others.

Although recent marketplace volatility has created large share price decreases and almost everyone has experienced an over 20% to 25% stock price drop, insureds will need to point to a company-specific crisis in order to trigger the coverage as opposed to a more general macro factor. A determining factor as it relates to claims will be whether or not a significant drop in market share was caused by board or executive mismanagement.

With respect D&O market conditions, the current D&O liability marketplace is firming to hard depending on industries and other risk factors, such as IPOs or Section 11 exposure. Market volatility and coronavirus-related events can further tighten the market, causing carriers to reduce capacity, increase premiums, and increase retentions. We expect D&O underwriters to ask questions regarding the impact of coronavirus crisis and steps their insureds have taken to mitigate the risk. How a company response to the crisis will matter a great deal to underwriters.

Other executive risk insurance policies may also be impacted by the coronavirus-related crisis. In addition to reviewing the D&O liability policy, we recommend insureds review all executive risk lines of insureds, including special crime, employment practices liability, fiduciary liability, and commercial crime. Special crime policies provide coverage for kidnap, ransom, and extortion demands, as well as crisis management expenses associated with an insurer. They may contain sublimited amounts for evacuating expatriates to the resident country, as well as evacuating insured persons to their resident country for security-related reasons.

Though the actual threat of evacuation of insured persons as a result of the pandemic might highly be encouraged by countries and insureds alike, a pandemic-related evacuation would not trigger coverage unless, of course, it is a security-related event. With respect to employment practices liability, we've seen a significant amount of companies [INAUDIBLE] of over 30%. In addition, the number of companies have also recently announced temporary leave for thousands of employees, including hotel chain Marriott and oilfield service giant Halliburton.

In addition to the temporary leave, we anticipate a number of companies reducing their force and implementing mass layoffs. As with any mass layoff, the risk of litigation increases, and employers are forced to determine-- or to terminate employees, triggering wrongful termination suits, discrimination suits, and harassment suits. Additionally, with a number of companies adopting work-from-home procedures, a number of non-exempt employees will be working remotely, potentially creating wage and hour exposure.

In addition to reviewing travel policies, communicable diseases procedures, and crisis response plans as it relates to employees, we recommend all insureds review the overall EPLI or Employment Practices Liability Insurance limit of liability, as well as review the policy to identify any Fair Labor Standards Act or FLSA-related exclusions that would preclude claims brought against alleging wage and hour exposure.

Fiduciary liability, which provides coverage for any benefit plan, the plan sponsor, or any planned fiduciary for any allegations of a risk of violations, also contains a bodily injury and property damage exclusion similar to that of the D&O policies. Though the likelihood of fiduciary litigation seems relatively low as it relates to coronavirus crisis, we recommend insureds review their policy language as well as the various supplements that could be applicable for violations of HIPAA.

Finally, the commercial crime policy provides coverage money and securities—for loss of money securities as a direct loss to certain causes, including employee theft. As companies are forced to adopt work-from-home policies, a company's operations may become decentralized, leading to more opportunities for employees to embezzle company funds. Additionally, as with mass layoffs, spending mass layoffs, disgruntled employees, or employees who feel they may soon be terminated may look to create elaborate plans stealing from the company for short-term gain. We recommend all insureds review the commercial crime policy of limited liability and coverage trigger to ensure adequate coverage is available in the event of any increase in claims.

Well thank you for your time today, and of course, if you have any questions or would like to discuss further how the current coronavirus-related crisis could impact your executive risk policies, please reach out to your McGriff executive risk advisor. That's all we have for today. Please stay safe out there, and of course, please let us know if you have any questions. Until next time, goodbye.

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