March 17, 2020 by Greg Meckbach
If your clients are accused of failing to warn shareholders of the impact of COVID-19, their directors and officers could have liability exposure, experts from Marsh suggest.
Generally speaking, directors and officers tend to have the same liability exposure as they would with any other event affecting the business, said Sarah Downey, U.S. directors and officers product leader at Marsh Inc. This is true for product recall, a cyber breach, or sexual harassment claims.
“Specific to COVID-19, a public company director or officer, for example, could be sued in a securities class action for failing to disclose the impact of the virus on the company, or materially misrepresenting the company’s preparedness in its filings [with the Securities and Exchange Commission,” she said on a recent webcast, before the pandemic prompted states of emergency on both sides of the border.
Although her comments were specific to the United States, the Ontario Securities Act lets shareholders sue companies for misrepresentation in the secondary market on this side of the border, where the provinces (and not the federal government) have the power to make laws governing the stock and bond markets. In shareholders’ class-action lawsuits in Canada, plaintiffs’ law firms would typically look at a one-day drop in share price, said Paul Shore in an earlier interviewer with Canadian Underwriter. He was the international practice leader for management liability at Navigators Group Inc. at the time of the interview.
During its webcast, Managing the Coronavirus Outbreak’s Continuing Effects, Marsh was asked what kind of liability do directors and officers have.
“Keep in mind there has to be an accompanying stock [price] drop for there to be a securities class action, and time will tell whether we have that kind of trigger,” said Downey.
“Probably the most important exposure for a director or officer is a lawsuit alleging breach of fiduciary duty,” she said. This would apply to any client, whether it’s a public company, private company, or non-profit.
“If you are a director or officer, and you are sued in a derivative action for breach of fiduciary duty, that exposure is likely not indemnifiable,” said Downey. By that, she means the company may be unable to indemnify the individual director or officer if there is a settlement or damage award resulting from the litigation.
In a situation like this, the director needs some sort of Side A Difference in Conditions coverage; otherwise they are not covered at all.
Side A provides additional coverage to certain individual directors and officers rather than the underlying entity. “You should definitely check with your insurance advisor to make sure you have the right kind of Side A insurance in place,” Downey said.