Businesses are being sued for alleged misconduct arising from the COVID-19 crisis.

Just a few weeks into the COVID-19 outbreak in the United States, two securities class actions were filed against Norwegian Cruise Lines and Inovio Pharmaceuticals alleging false statements regarding COVID-19 issues made in their public disclosures. (See Douglas v. Norwegian Cruise Lines, No. 1:20-cv-21107 (S.D. Fla.); McDermid v. Inovio Pharmaceuticals, No. 2:20-cv-01402 (E.D. Pa.).)

These securities class actions are just the start of claims arising from the COVID-19 crisis.

The next wave of claims will likely include direct actions against directors and officers arising out of their handling and response to the COVID-19 crisis. Shareholders may allege that the executives failed to adequately and accurately disclose critical information in the company’s public disclosures. Shareholders may allege that company executives failed to adequately prepare for the economic downturn that resulted from the COVID-19 shutdown. There may be claims for breach of fiduciary duty arising out of the difficult decisions executives make over shutting down certain operations while continuing to pay executive compensation and bonuses. There may even be consumer claims that allege company executives misrepresented the company’s product in connection with the COVID-19 outbreak.

No matter the form, once these claims are asserted, executives should consult their insurance policies and evaluate the coverage they have available to them. One significant type of coverage available to company executives is directors and officers liability insurance (or D&O). Below is an analysis of D&O coverage and some of the issues associated with these potential COVID-19 claims.

D&O coverage applies to company executives, including past, present and future directors, officers and management committee members. In some cases, the coverage also applies to the company itself and to non-executive employees.

D&O coverage applies to a broad range of claims. While the specific policy language varies, a typical D&O policy provides coverage for “loss” arising from a claim for a “wrongful act” committed by the executive. “Loss” typically includes damages, judgments and settlements for which the executive becomes responsible for a covered claim. “Loss” usually also includes payments for defenses costs, including attorney fees and other expenses incurred by the executive in defending the covered claims. A “wrongful act” is broadly defined to include any breach of duty, neglect, error, misstatement, misleading statement, omission or act by an executive in their capacity as a director or officer of the company. (See, e.g., AIG Form 95727 (9/07) pp. 5-6.)

In sum, the policy covers claims for misconduct against an executive that arise out of the executive’s work for the company.

While D&O coverage is expansive, it is also limited by the policy’s exclusions and definitions. This is the “fine print” that drives most policyholders crazy. Executives need to read the insuring agreements at the front of the policy and reference the definitions to understand the scope of the coverage and then read the exclusions to determine the limitations on coverage. Common policy exclusions that could limit coverage for COVID-19 type claims would include the bodily injury, pollution, and insured v. insured exclusions.

The bodily injury exclusion typically excludes coverage for third-party claims of bodily injury, sickness, disease, or death, although many policies carve out securities claims from this exclusion. The bodily injury exclusion likely would exclude coverage for claims that company executives allowed people to catch the COVID-19 virus. Most commercial general liability policies, however, would provide coverage for executives for these types of claims.

The pollution exclusion typically excludes coverage for claims based on the actual or threatened discharge of “pollutants.” The typical definition of “pollutants” includes the more obvious things like chemicals, acids and vapors. These types of “pollutants” would not provide the insurance company with a basis to exclude COVID-19 claims. But some definitions of “pollutants” also can include terms like “germs.” This could provide a basis for denial of coverage.

The insured v. insured exclusion typically excludes claims by the company or company executives against another executive. The purpose of this exclusion is to prevent collusion between the insureds such as when a company sues its executives to recover losses caused by business mistakes. Thus, COVID-19 claims by an executive against a different executive would likely be excluded from coverage.

One additional issue to note is that most D&O coverage is claims-made. Claims-made coverage is triggered based on the timing of when the claim is made. D&O coverage applies to claims that are made during the policy period. This coverage contrasts with an occurrence policy where the coverage applies based on when the injury took place. Thus, it is important to provide notice of a claim to the insurance company as soon as possible.

As the frequency of COVID-19 claims increase, and plaintiffs start to allege that executives are responsible for plaintiffs’ injuries based on the executives’ alleged misconduct in handling the COVID-19 crisis, executives should be sure to review and tender their claims to their D&O insurance company. The coverage will protect the executive from loss associated with the claims, including payment of judgments or settlements and defense costs.