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COVID-19 and its impacts on D&O insurance

What are the impacts of COVID-19 likely to be on D&O Insurance renewals?

With the current challenges being faced by Boards during the COVID-19 pandemic, Directors & Officers insurance is likely not to be top of the Board’s mind if there isn’t a pending renewal. Boards are more likely to focus on the immediate needs of the organisation and implementing their business continuity plans for a life beyond COVID-19. Once business continuity is restored, however, Boards will consider what their D&O insurance renewals will look like in an already hardening D&O Insurance market.

The usual risks that Boards face do not fall away just because of COVID-19; however, there will be additional questions in some of the key risk areas that underwriters will want more information on. Underwriters will be adding more specific “COVID-19” questions to their usual underwriting analysis in order to understand the Board’s preparedness for COVID-19, responses during the pandemic and post COVID-19 actions to sustain future operations. If satisfactory answers can’t be provided underwriters may mitigate the risk through the addition of certain COVID-19 exclusions.

Questions you might see during your renewal:

    1. Do the business continuity plans take into account an ongoing threat?
    2. Have directors tested the appropriateness of their business continuity plan on:
      a. their employees;
      b. their supply chain;
      c. the financial condition of the business.
    3. Have the directors continued to communicate clearly and timeously with internal and external stakeholders throughout the pandemic?
    4. Is it possible for the Board to maintain standard risk / operational controls and procedures during the current pandemic? If not, how have they been operating?
    5. Have any COVID-19 related circumstances (including work from home arrangements) impacted continuous disclosure controls and procedures?
    6. Have the directors made the appropriate investigations to determine that the company can pay its debts as and when they fall due?
    7. What is the company’s current cash position like?
    8. If current conditions persist or deteriorate, when will you need access to additional capital or funding support?
    9. What are your current debt covenants and how is the business positioned in relation to continuing to meet them?
    10. Is the current business continuity plan time limited or is the alternate operating approach one that the directors can operate under indefinitely?

Some of the key concern areas for underwriters and where we might see potential D&O claims arise include: inadequate or poor continuous disclosure, employment or occupational health & safety concerns, and cyber & privacy risks.

Inadequate Continuous Disclosure

ASX listed entities will need to continue to meet their obligations throughout the pandemic. Underwriters will want to see how the Board has communicated with its shareholders and external stakeholders as well as with the regulators. As Cannings Purple note, “Clarity of Message is vital”.

•  Cannings Purple –  COVID-19 and communication

ASX has recently released guidance to ensure that companies are diligent in their updates to the market about COVID-19. While they note that listed entity’s disclosure obligations “do not extend to predicting the unpredictable” significant impacts on a company’s business operations must be announced promptly and in compliance with continuous disclosure obligations.

Employment Claims / Occupational Health & Safety

One of the “softer” issues that underwriters may have questions around is how the transition to work from home was managed (if this was made available to staff in the organisation).

Were the appropriate risk management tools used when setting staff up to work from home?

Just because staff are physically distanced from the office have all company policies still been prioritized and communicated to staff?

Have redundancies/standing downs or variations in terms of employment all been conducted with due regard to the applicable legislation modified by any Federal variations?

What work health and safety procedures have been implemented to continue to manage COVID-19 related risks in the workplace (whether remote working or back in office)?

The Board will need to have examined any exposure which may arise due to potential differential treatment of staff during the pandemic.

Cyber

In a “work from home” scenario, Boards need to ensure that staff are adequately equipped to conduct their work safely and securely while operating remotely.

Have Boards taken the appropriate steps to ensure that staff are aware of their responsibilities online?

Have appropriate security and privacy safeguards been installed?

Has appropriate staff training been undertaken to make staff aware of heightened risks during the period of remote working?

While most D&O policies are not written with cyber or technology risks in mind, it is not inconceivable that D&O liability could arise if it can be demonstrated that Boards did not adequately protect against the harm and ensure the appropriate safeguards were in place.

Please refer to our Cyber Insurance during COVID-19 page for more details here.

Beyond COVID-19

During the pandemic, the focus has been on business survival. As we emerge at the other end and begin the transition back to work in “normal” conditions Boards will need to revisit their pre-COVID 19 strategies, business plans and forecasts. Boards can use the opportunity to identify what areas were managed well during the crisis and areas for improvement or amendments needed to crisis management plans.

Directors duties are never under more scrutiny than during a crisis and unfortunately, this is where failings in procedures can be exposed. However, where Boards have acted swiftly and demonstrated clear and effective direction to staff and stakeholders alike, they will be placed in a stronger position during their insurance renewals.

KBI works with clients in preparing a submission to underwriters to help obtain the most competitive D&O renewal terms available to them. Feel free to get in touch with us to discuss how best to present your company at your next renewal.

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KBI is a national specialist insurance brokerage that has rapidly developed a reputation for being the insurance partner of choice, providing expert knowledge and specialised solutions across a range of insurance products.

If you have any questions or concerns regarding the above, please contact us directly; we’re happy to assist. Chat to us on 1800 181 310 or drop us a line at: info@kbigroup.com.au.

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