Directors’ and officers’ and company liability – risks and insurance issues from COVID-19

We expect that the pandemic may expose directors and companies to claims brought by:
  1. employees who may have been exposed to COVID-19 whilst working; or otherwise have not been “properly” dismissed and received entitlements.

  2. regulators for failing to take appropriate actions in responding to COVID-19.

  3. shareholders against directors who have failed to develop adequate contingency plans, observe or implement policies and procedures, or fail to properly disclose the impact of COVID-19 on the company's business and financial performance.

  4. creditors/liquidators/examinations for the company failing to pay debts as and when they fall due.
These policies can extend to cover the company, but normally cover the directors and officers of the company for allegations of wrongful management. The policies are claims made. These policies include:
  1. directors’ and officers’ liability - covers the directors and officers for allegations of wrongful acts against them in the management of the company;

  2. employment practices liability - extends to cover the company and its directors and officers for allegations of wrongful acts including wrongful termination;

  3. statutory liability – extends to cover the company and its directors and officers for actions brought by regulatory authorities for breaches of various acts of parliament by the company (or its directors or officers).
Indemnity provided by these policies is available (generally) for legal costs and expenses to defend allegations of wrongful acts (or costs defending inquiries brought by authorities), compensatory penalties for breach of statute (provided that these penalties are deemed insurable at law) and damages/adverse costs for wrongful acts in which the “insured” (company/director) becomes legally liable.

Insurance product evolution has seen these covers incorporated into what is known as “Management Liability” insurance (“ML”). ML is generally available to privately held companies and aggregate all covers under one policy limit. Publicly listed companies will generally purchase the coverage “separately”.
Directors’ and officers’ liability

There has been significant commentary regarding the hardening of the market for this type of insurance.  It has been subject to significant claims activity.  Insurers’ are very selective in underwriting the class and the cover that they are offering is becoming narrower. Premiums and excess are increasing.

These policies are generally put in place for the benefit of natural persons (directors and officers of corporations). Cover can be extended to cover the entity  i.e.  for securities claims. This is where there has been significant claims activity (claims against corporations in connection with its securities) and the premiums for this cover are extremely expensive, if the company can obtain the cover.

The emergence of COVID-19 has caused further concern for insurers underwriting this class. The fear being that companies and their directors may be exposed  to claims for a range of allegations from alleged mismanagement of the company during the pandemic. Companies and their directors must take appropriate steps to respond to the impact of COVID-19. In its article “Responding to COVID-19”, on 9 March 2020 McKinsey & Company, prepared the following checklist:

McKinsey

The Australian Institute of Company Directors also published on 6 March 2020 “COVID-19 – how should your board respond?”[1]

Globally, cases have already been brought against directors and officers alleging their failure to respond adequately and mitigate against the effects of COVID-19. It may be that claims here in Australia will be brought by shareholders, employees, suppliers and even regulatory authorities against directors.

There is a likelihood that there will be increased insolvencies following the next 6 months. The Coronavirus Economic Response Package Omnibus Act 2020 (Cth) seeks to safeguard companies and their directors against insolvency. The package includes that:

  1. there is a new 'safe haven' for directors that cause a company to incur a debt in the "ordinary course of the company's business" while insolvent (provided the debt was incurred honestly and to help continue operations through this period);

  2. debt required for a creditor to issue a statutory demand from AUD2,000 to AUD20,000;

  3. the minimum amount of debt required for a creditor to issue a bankruptcy notice or creditor's petition from AUD5,000 to AUD20,000;

  4. the minimum amount of debt required for a creditor to issue a bankruptcy notice or creditor's petition from AUD5,000 to AUD20,000;

  5. the time limit for a company to respond to statutory demand has increased from 21 days to 6 months.

Whilst these provisions may provide some relief for companies and their directors, common law duties regarding insolvency will still apply.  Insureds should check their D&O policies as to whether they carry “insolvency exclusions”. These provisions exclude claims where the company “fails to pay its debts as and when they fall due”.

As an aside, we have been apprised that many privately held companies’ directors/owners are making significant loans to ensure their companies remain solvent. Where this happens, those owners/directors should take advice on protecting their investments in circumstances where the company can no longer continue to trade through these difficult times and become insolvent. To mitigate against same, such loans ought to be secured by general security agreements which are registered.  You should seek the advice of your lawyer/accountant in this regard.  If you would like direction to obtain this advice, please contact Bellrock so that we can direct you to one of our panel lawyers.

Employment Practices Liability

Directors and Officers Liability covers “employment wrongful acts” (wrongful dismissal etc.) that are brought by employees against directors or officers. It will not ordinarily cover however the company.  Most of these claims are now brought against the company as distinct from directors or officers – otherwise, they are brought against both.

It is also very important to check the scope of indemnity provided by the policy.  Statutory entitlements are excluded by the policy – so in circumstances there is a claim brought and such entitlements are not paid, these will generally not be recoverable under the employment practices/directors and officers liability policy in respect of employment liability claims.

The frequency of claims made for “employment wrongful acts” is likely to increase following the pandemic. Insurers fear that this may not only be for cases of “wrongful dismissal” but may also extend to discrimination. There is already the emergence of claims alleging discriminatory behaviour by employers.. Directions to employees targeting a particular race or ethnicity will likely be considered discriminatory.

Employment policies and procedures responding to COVID-19 are critical. Insurers will want to understand:

  1. what notices have been issued to staff and that the company has taken advice as regards its obligations to employees in the event of terminations.

  2. how do COVID-19 absences affect employee wages? What exposure is there to the employer? What impact has JobKeeper had on the company.

  3. how employers handle employee quarantine cases in connection with staff privacy?

  4. the extent to which employers ask employees to refrain from personal travel that might expose them to COVID-19? When can employers require employees to stay home? When can employers require employees to come in to work?
External advice from employment lawyers should be sought in connection with each of the above issues.
Statutory Liability

Inquiries and examinations may also increase as regulators review the conduct of companies and their directors during and after COVID-19. There is a concern that regulators may focus on public examinations of company directors (where companies have become insolvent), issues of taxation and WHS inquiries.

Even before COVID-19, regulators had become more active, particularly with regard to Work Health and Safety.  The costs alone for enquiries brought by the various State Regulators are on average ~$300,000 for a simple matter. Environmental regulators have also become more active and greater obligations exist for directors, and fines ensue, to strict new environmental laws.

It is also important for companies and their directors to consider their obligations under the Privacy Act. This now more than ever with remote working arrangements potentially causing greater vulnerability to networks.

Steps to take
  1. Governance, compliance, disclosure: directors and officers must take practical steps to respond to issues arising from the pandemic (employee issues, response and communication team for policies and procedures, attend to cashflow and liquidity, assess the impact and benefits of Government and other forms of relief, review and stabilise supply chain, stay close to and assess client/customer sales and impact on the business, clearly articulate and demonstrate the business plan to all stakeholders.

  2. Take advice insofar as the Company’s risks and whether response is adequate. Consult with experts (lawyers, accountants, insurance broker/risk manager). [2]

  3. As regards coverage:

    • directors to review policy wordings to ensure that there is cover for the company as well as “natural persons” for allegations of wrongful acts.

    • insureds need to check whether an insolvency exclusion has been applied.

[1] https://aicd.companydirectors.com.au/membership/the-boardroom-report/volume-18-issue-3/coronavirus-how-should-your-board-respond

[2] Bellrock has a panel of experts who can advise directors and companies about their respective duties and obligations.  Directors are aware that risks present resultant of COVID-19. They need to show that they are addressing the risk and taking proactive steps to mitigate against it.  These steps will be key in formulating “defences” should claims or inquiries commence.  Bellrock has a panel of experts we can coordinate for our clients to ensure that they are taking reasonable and necessary steps.