Insurance Coverage For COVID-19 Claims Under D&O Policies | SmithAmundsen LLC
To date, much of the insurance industry’s focus on the Coronavirus (COVID-19) pandemic has been on business interruption coverage under commercial property insurance policies. There have been numerous lawsuits filed alleging that COVID-19 and/or other attendant circumstances trigger the insuring agreements of these policies. That question, whether COVID-19 constitutes a “direct physical loss of or damage to property,” as property policies generally require, will likely be the single most litigated issue in connection with COVID-19 claims in the foreseeable future. This makes sense given the immediate and far-reaching economic implications faced by the industry.
In the long-term, however, carriers should expect a myriad of claims under personal, commercial, and professional lines. Of the professional lines likely to be affected, and for which lawsuits have already been filed under, are directors & officers liability policies (D&O). D&O coverage typically provides defense and liability costs to directors and officers of organizations for claims made against them while acting in their official capacity. While no two policies are the same, a typical D&O policy may cover three types of losses, referred to as Sides A, B, and C. Side A covers a director’s or officer’s direct losses, i.e., those not indemnified by the organization. Side B covers losses relating to claims made against the directors and officers for which the organization has indemnified them, i.e., the organization gets reimbursed when it indemnifies its directors or officers or advances legal costs on their behalf. Side C covers losses incurred based on claims against the organization itself (often referred to as “entity” coverage). D&O coverage is nearly always written on a claims-made basis.
As businesses and the economy continue to reopen and employees go back to work in shared spaces, there could be a surge of claims alleging directors and officers (or any management-level employee) engaged in “wrongful acts” that exposed individuals to COVID-19. An increase of claims and lawsuits alleging that companies and their officers and directors contributed to drop in stock price or other negative financial consequences related to COVID-19 should also be expected. In all of these instances, the specific language of a D&O policy should be examined in conjunction with the applicable state’s law in considering whether such claims are within the scope of coverage. After that, the next step is to examine policy exclusions. This article provides an overview of both, as well as a sampling of current issues in litigation.
Is the Lawsuit Within the Scope of Coverage?
A typical D&O policy’s insuring agreement covers “insured persons” for “loss” which they are legally obligated to pay resulting from a “claim” first made during the policy period (or any extended reporting period, which this article does not discuss) for a “wrongful act.” Some policies also specifically include insuring agreement provisions for indemnification (Side B), and coverage for the organization (Side C).
The term “insured persons” may include: (1) directors and officers; (2) natural persons who were, now are, or shall become members of a management or advisory committee of the organization; and (3) natural persons who were, now are, or shall become employees of the organization.
“Loss” may be defined to mean defense costs, but it may also be defined more broadly to include the total amount of monetary damages which the insured becomes legally obligated to pay on account of a “claim” for a “wrongful act.” The definition may include or specifically exclude punitive or exemplary damages, and the definition often may not include taxes, criminal or civil penalties imposed by law, restitution, or disgorgement. See, e.g., Level 3 Communications, Inc. v. Fed. Ins. Co., 272 F.3d 908, 910 (7th Cir. 2001) (applying Illinois law) (finding that “loss” does not include ill-gotten gain); Pan Pac. Retail Properties, Inc. v. Gulf Ins. Co., 471 F.3d 961, 971 (9th Cir. 2006) (applying California law) (recognizing that one cannot insure against the risk of being ordered to return money or property that has been wrongfully acquired).
The manner in which a “wrongful act” is defined also varies by policy. A typical definition follows:
Wrongful act means any actual or alleged error, misstatement, misleading statement, act, omission, neglect or breach of duty committed, attempted or allegedly committed or attempted on or after the Retroactive Date, if any, set forth in the Policy and prior to the end of the policy period by:
- Any of the insured persons in the discharge of their duties solely in their capacity as insured persons of the organization;
- Any of the insured persons of the organization in the discharge of their duties solely by reason of their status as such; or
- The organization.
Again, any policy under which a claim is made must be specifically examined because these definitions will vary. Moreover, there will be a host of other issues to unravel with respect to whether a claim or lawsuit meets the insuring agreement of a D&O policy, including, non-exhaustively, considerations concerning reporting periods and whether requested remedies constitute insurable losses.
Do Policy Exclusions Apply?
The following are some examples of exclusions that, depending on specific factual allegations, may be included in a D&O policy and could be raised by insurers as a basis for a denial of coverage.
- Exclusions for Bodily Injury/Personal Injury and/or Property Damage
These exclusions generally preclude coverage under a D&O policy with respect to a claim for actual or alleged: (1) “bodily injury” (which usually includes sickness, disease, or death of any person, mental anguish or emotional distress) (See, e.g., Waller v. Truck Ins. Exch., Inc., 900 P.2d 619 (Cal. 1995), as modified on denial of reh’g (Oct. 26, 1995)); (2) “property damage” (including, but not limited to, physical injury, loss of or loss of use or currency or any negotiable or non-negotiable instruments or contracts representing money); and/or (3) for the list of enumerated offenses set out in a policy’s definition of “personal injury” (or “personal and advertising injury”).
Claims for “bodily injury” will likely be the focus here. For a “bodily injury” exclusion to preclude coverage, there must be some nexus between the injury and the alleged “wrongful act.” See, e.g., Philadelphia Indem. Ins. Co. v. Maryland Yacht Club, Inc., 742 A.2d 79 (Md. Spec. App. 1999) (refusing to apply exclusion for “bodily injury” because nexus between the alleged wrongful termination and the injury was too attenuated); Fireman’s Fund Ins. Co. v. U. of Georgia Athletic Ass’n, Inc., 654 S.E.2d 207, 213–14 (Ga. App. 2007) (holding that for the “bodily injury” exclusion to bar coverage, the nexus between the claimant’s bodily injury and the claims against the insured cannot be too attenuated; thus, where no conduct by the insured is related to the claimant’s bodily injury, the “bodily injury” exclusion does not preclude coverage).
There is a limited amount of case law interpreting pollution exclusions in the context of D&O coverage. Nonetheless, depending on the facts and the language of a particular policy, these exclusions could form the basis for denials under D&O policies for claims made in connection with COVID-19. See High Voltage Engr. Corp. v. Fed. Ins. Co., 981 F.2d 596, 601-02 (1st Cir. 1992) (Massachusetts law) (ruling that a pollution exclusion in an executive liability and indemnity policy barred coverage for claims of unfair and deceptive trade practices made against directors of an insured company stemming from the alleged disposal of hazardous waste because the court determined that the directors’ “wrongful acts” were related to the disposal of hazardous wastes); see…