Publicly-traded firms have been sued in the past after share prices dropped as a result of what Roy calls “external factors.”
With the pandemic, there could be allegations that boards of directors did not have proper governance or risk management practices, said Jim Auden, Chicago-based managing director of North American Insurance at Fitch Ratings, in an interview Tuesday.
Corporate clients – as well as their directors and officers – are exposed to misrepresentation lawsuits if the company’s share price drops. Usually what happens is shareholders allege a company, as well as individual directors and officers, had misrepresented the financial health of the firm.
In the case of COVID-19, clients could defend themselves by referring to statements they made in securities filings before the outbreak, Roy said in an interview about stock market fluctuations during the first quarter of 2020. This depends on exactly what those firms said in those filings (such as management discussion and analysis) before the outbreak of the COVID-19 virus.
“If they do address it, it has to be specific,” said Roy. “It cannot be boilerplate and it needs to deal with the impact on their business directly.”
That said, publicly traded firms are not generally required to interpret the external, political, economic and social developments on their own finances, Roy said, quoting guidance from the Canadian Securities Administrators.
What could hurt the client’s directors and officers is if they told the financial markets they were well-prepared for this type of crisis.
“I think we see a lot of companies who say in securities documents, and generally communicate to the market, that they are ready for eventualities, that they have got these business continuity plans in place,” said Roy. “We see this around cyber security, and that kind of thing, and it turned out they were actually not as prepared as they thought they were or that they communicated that were. So I think those are the kinds of things that I think we are going to see litigation around: [Plaintiffs alleging] ‘You told us you could handle a situation like this and you haven’t.’”
With COVID-19, the P&C industry will face more liability claims, Auden predicts. He was asked this week about the impact on P&C insurers of commercial P&C coverage disputes arising from the pandemic, such as business interruption. “There are definitely areas of exposure to insurers other than BI,” Auden said.
Insurers have generally made it clear that they intend to exclude contagious disease from BI, and that BI claims first require physical damage to property, said Auden. It’s too early to tell what the industry-wide loss will be, he added.