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Client Alert: D&O Insurance Issues In The COVID-19 Context

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The COVID-19 (coronavirus) pandemic has wreaked havoc on the economy and roiled the banking system. Such crisis always leads to litigation and this crisis will be no different.

We have already seen class action lawsuits filed by bank customers who failed to receive loans from their banks under the Paycheck Protection Program (PPP). We have also seen class actions filed against publicly-traded companies and their respective officers alleging that they failed to properly disclose the financial risks associated with the pandemic.

Litigation Risk Growing

We anticipate that litigation against banks and their officers and directors will multiply over the coming months related to losses associated with the COVID-19 pandemic. In addition to civil litigation, we anticipate that banks and their officers and directors will be the subject of regulatory and/or government investigations into everything from how banks administered the PPP loans, how banks managed their risks during the crisis, and how banks’ capital levels have been affected by the crisis. And while directors’ fiduciary duties and responsibilities have not fundamentally changed during the crisis, many directors are wisely requesting more information more frequently from management regarding these issues.

As always, we recommend that banks promptly report any claim to their insurance broker and insurers to ensure that they receive the coverage afforded under their policies.

D&O Policies

In addition, banks may wish to consider providing a “notice of circumstance” of potential liability before renewing their existing D&O policies. D&O policies are “claims made” policies. They provide coverage for a claim made and reported during the policy period.

We understand that some D&O insurers are considering adding exclusions relating to COVID-19 or “viruses” in future policies. Such exclusions generally are not found in existing policies.

We Can Help You

A claim filed under your current policy may be covered while that same claim may be excluded under a renewal policy. In an effort to avoid that possibility, you should consult with us and your insurance broker prior to renewing your current D&O policy to determine if you should send a “notice of circumstance” to your insurer.

A “notice of circumstance” notifies the insurer of circumstances of which you are currently aware that may give rise to a claim in the future. While coverage for the future claim is not assured, the “notice of circumstance” at least gives you an argument that a future claim should be covered by an existing policy (that does not contain a COVID-19 or virus exclusion). The “notice of circumstance” usually must provide sufficient facts that describe the basis for any potential future claim. While that is difficult to do, it may be worth the effort in order to try to preserve coverage for future claims.

COVID-19 Resources

We recommend reviewing the following pandemic-related business and legal considerations we have been discussing with our clients:

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