As has been widely reported, insurance companies have been inundated with claims arising from the novel coronavirus and are locked into contentious coverage battles regarding the scope of coverage afforded for such claims under various policy forms. Courts have begun issuing decisions both for and against policyholders attempting recovery for COVID-19-related losses, and the legal battles resolving those questions will likely take months or even years to play out.
The insurance industry’s attempt to mitigate the risk of paying those covered claims, however, has been swift and severe. According to a second-quarter 2020 report issued by The Council of Insurance Agents & Brokers, all respondents surveyed reported slight to significant increases in premiums for all account sizes and all lines of business. The most significant increases were not in commercial property policies, which provide coverage for business interruption losses, but rather for umbrella and directors and officers liability, which had a 20 percent and 16.8 percent increase, respectively. Others have predicted that even companies with stable financials, favorable claim history, and no increases in risks are likely to encounter significant premium increases (up to 40 percent), as well as more restrictive coverage.
A nearly 20 percent increase in D&O premiums can cost a company tens of thousands, if not millions, in additional insurance costs every year. As we previously reported, this recent price hike comes at a time when businesses across virtually all sectors face a real D&O risk of COVID-19-related litigation alleging that companies and their directors, officers, and other executives and employees breached their duties or violated securities laws in the context of COVID-19 exposures. Those lawsuits, many of which have already begun, could arise from government investigations into the company’s response to COVID-19; securities law claims arising out of COVID-19-related disclosure obligations and management issues; claims by creditors in insolvency or bankruptcy; fiduciary claims related to employee benefits plans; or cyber-related claims from shareholders for alleged failures to comply with cybersecurity standards or breach notification laws in the event of a security event or fraud perpetrated by hackers exploiting COVID-19-related vulnerabilities.
While companies are facing increased costs for less coverage, insurers reportedly are attempting to leverage the pandemic to boost profits long after coronavirus has been contained. We have previously recognized that many US insurers are actually reporting higher levels of net income during the pandemic. But recent reports have addressed more concerted efforts by insurers to solicit private investments on the expectation that the insurance industry will not only avoid crippling losses but will be able to rely on the pandemic to usher in longstanding, significant premium increases to boost profits.
The message from this behind-the-scenes fundraising tells a very different story from the reports of possible hundred-billion-dollar claim payouts and potential insolvency if insurers provide coverage for COVID-19-related losses suffered by the thousands of businesses shuttered by the pandemic. The fallout from coronavirus is far from certain, but, at a minimum, businesses seeking to procure or renew D&O insurance (or any other line of coverage) should expect resistance, both in the form of significant premium increases and more restrictive coverage than in years past. Retaining experienced professionals to market the risk and assess the potential impact of altered policy terms can help mitigate risk and understand the scope of coverage in these uncertain times.