A Director's Guide to Coronavirus, Including Frequently Asked Insurance Questions

This blog post can also be found on our Coronavirus Resource Center.

With coronavirus, or COVID-19, saturating the news, many directors and officers are asking the following question: Will there be D&O suits related to the coronavirus? While understandable, from a director's perspective I think it's the wrong question.

A better question for a director to ask is this: How are our plans for this type of risk unfolding, and do we need to make changes given any new information we may have?

When it comes to enterprise risk oversight, a big part of a board's role is making sure that there are good crisis and contingency plans in place before there is a crisis. A board may also have a role in supporting the rollout and modification of those plans by asking management good questions in a timely manner as well as bringing to bear experiences individual board members may have had in similar situations.

In this article, I'll discuss three areas in which directors might want a briefing from management. I'll also discuss some frequently asked insurance questions when it comes to the coronavirus.

Questions for a Board to Ask Management

1. How is the company taking care of its people?

The COVID-19 (aka novel coronavirus) situation is a serious one, and it is unclear when things will get better. Employers will want to be sure that their employees have good information about things like staying home if sick, proper handwashing, and how to interact with customers and clients.

In some workplaces there may be a tendency for workers to show their dedication by coming to work even if they are not feeling well; management needs to shut down this type of counterproductive machismo. It's useful to remind your employees that coming to work when they are sick may harm fellow employees and others. This includes members of other employee's households who may be very young, very old, or otherwise immunocompromised. It's appropriate to let people know that" everyone needs to do their part to stop the spread of this virus."

Woodruff Sawyer and others have put out a lot of good information about specific guidance for employers during this time.

Not all companies are in a business where working from home is viable. Companies that have this option, however, are now allowing, encouraging, and in some cases insisting that their employees work from home for the time being. Ideally, you are activating a work-from-home plan that was already part of your crisis management plan. Effective work-from-home procedures are the cornerstone of a solid crisis management plan.

A big question right now is how to handle travel. Remember that people handle the stress of things like reports of the coronavirus differently. Some seasoned road warriors who are healthy may not be particularly bothered by the thought of getting on a plane right now, particularly domestic flights. Others who travel less frequently might not want to travel at all given coronavirus concerns.

A good strategy is to allow your employees to make good business decisions, perhaps with the scale tilted toward not traveling if a video or phone call meeting will suffice. Many companies have already completely stopped all international travel, and no doubt some will soon stop all domestic travel as well. In addition, your company's employees may end up not traveling for in-person meetings or events anyway due to other companies prohibiting non-employees from coming into in their buildings, or the relevant event being canceled.

One concern that needs to be addressed is what to do if an employee wants to carry on with personal travel plans. For example, as an employer you do not want to be in the position of asking an employee to cancel a destination wedding. On the other hand, you will want to stress the importance of your employee's sharing personal travel information with you so that you can make a determination as to whether you want your employee to refrain from immediately coming back into the employee community upon return.

Above all, boards should encourage their CEOs and other management leaders to remain visible and accessible as a credible source of reliable information. A recent Harvard Business Review article makes the point:

In our connected world, employees have direct access to many sources of information. Leaders might reasonably conclude that there is so much information and commentary available externally that they don't need to do anything additional. We have found, however, that creating and widely sharing a regularly updated summary of facts and implications is invaluable, so that time is not wasted debating what the facts are—or worse, making different assumptions about facts.

2. How is the business being impacted, and what are our business prospects?

This is where a company's risk factors get real. Have you already identified supply chain risk in your risk factors? That risk is now being realized. Is your business dependent on travel? You obviously have a problem.

On the other hand, are you in a market segment that is getting a boost as people react to the current situation? There are some companies that are seeing some financial upside in the short term.

Boards will want to ask management about their plans, and to what extent they are updating their forecasts. This is a good time for seasoned board members who remember things like the 2008-2009 downturn to challenge any plans or forecasts that might seem overly optimistic.

For instance, is the management team realistically assessing customer behavior given the current crisis, including how long it might take for customer behavior to revert to what was normal before the crisis? Are your cash reserves sufficient to get through the storm? What assumptions about the business need to be corrected in light of current events? For other useful questions to ask about the business, check out Sequoia Capital's recent communication to its portfolio companies.

Boards may also want a briefing on how the company is communicating with its customers. For those who bring customers on-site, it would be good to know what protocols are in place to address COVID-19. This is a dynamic situation, so understanding who is leading the charge at the company—often a dedicated crisis-management committee—would also be good to know. The last thing you want is for late-breaking, time-sensitive information to be trapped in the wheels of bureaucracy.

3. What are we saying to our investors?

The SEC is encouraging issuers to make appropriate disclosures about how the coronavirus is impacting their businesses, and investors will want the same updates. This is a good time to consult with outside counsel and get a feel for what others in your industry are doing.

Some issuers are swiftly adopting new risk factors that are specific to the coronavirus outbreak, including commentary about business disruption and the fact that no one knows when the coronavirus situation will be resolved. Indeed, some companies, such as United Airlines, have gone so far as to rescind their 2020 earnings guidance.

The law firm Skadden Arps has provided a useful list of disclosures that may need to be updated in light of the coronavirus, such as: guidance, risk factors, MD&A, and proxy statements (the board's role in risk oversight).

Some of the issues you'll run into are tricky and can implicate serious privacy concerns. For example, what if your CEO has been quarantined? Or your entire management team has been quarantined? Or several key employees come down with COVID-19? There is no doubt that the fact that we may be talking about private health information makes this type of disclosure especially difficult. As always, the principles of materiality prevail when it comes to disclosure.

Consider, too, any shareholder events that may be coming up, such as your annual meeting. Depending on your state of incorporation, a virtual meeting might be an option. You'll want to look into this sooner than later to comply with relevant notice obligations. The law firm DLA Piper has released a useful overview of this topic, including what to do if you already called your annual meeting and now want to change it to a virtual meeting. [Update: On March 13, 2020, the SEC provided updated guidance on changing in-person annual meetings to virtual ones. The law firm Fenwick has provided useful guidance on how to handle the relevant state law logistics.]

One more thing: considering the potential issues raised by the coronavirus and the need to avoid even the appearance of impropriety vis-à-vis insider trading, discuss with outside counsel whether you need to close your trading window. On March 4, 2020, the SEC specifically highlighted this issue, noting that:

The Commission encourages all companies and other related persons to consider their activities in light of their disclosure obligations under the federal securities laws. For example, where a company has become aware of a risk related to the coronavirus that would be material to its investors, it should refrain from engaging in securities transactions with the public and to take steps to prevent directors and officers (and other corporate insiders who are aware of these matters) from initiating such transactions until investors have been appropriately informed about the risk.

For a cautionary tale on what can happen when a company fails to close the insider trading window despite the prevalence of internally known but undisclosed bad news, just think of Equifax.

Boardroom FAQs about Insurance and the Coronavirus

Since the COVID-19 outbreak, I've spoken to a lot of boards of directors. My colleagues and I have been invited into boardrooms as part of a normal D&O insurance-related conversation, and inevitably we've been asked about the insurance response to COVID-19. Here is a set of FAQs that we've developed from those conversations.

1. Will there be D&O claims related to the coronavirus?

Yes, but not many, and particularly not many securities class action lawsuits. There are two reasons for this:

A. The impact of COVID-19 is so widespread that many companies have already come out with well-written, updated disclosures, making it easier for other companies to do the same, and

B. It is harder for the plaintiffs' bar to sue one company for a stock drop when everyone else's stock price has fallen as well.

This is not to say that a company couldn't bring a securities class action suit on itself. Failing to disclose material changes to the business resulting from the coronavirus, particularly if coupled with insider trading by senior directors or board members, is the magic formula to draw a difficult securities class action suit.

Why? Because when the truth comes out, and it always does, it will be easy for the plaintiffs to allege that management withheld the truth so that management and the board could sell their shares at an elevated price.

The more worrisome suit is a breach of fiduciary duty suit since plaintiffs do not need to show a loss in the value of the stock in order to win this case. To the extent that a company significantly suffers due to the mishandling of the coronavirus situation, and the board of directors seems utterly missing in action, one could see a plaintiff bringing a breach of duty suit like the type we have seen in the Blue Bell Ice Cream (Marchand) case. Having said that, these are difficult cases for plaintiffs to win, especially so when a board has good meeting minutes that reflect the board's oversight of enterprise risk management issues, as I have discussed in an earlier article on this case.

You can expect your D&O insurance policy to respond to a coronavirus inspired securities class action lawsuit or breach of fiduciary duty suit as your policy would to any other. The only caveat is that the bodily injury exclusion typically found in D&O insurance policies be written narrowly, which is to say an exclusion "for" bodily injury and not an exclusion "arising from or in any way related to" a bodily injury. Most modern public company D&O policies would have the "for" version of this exclusion. This is unproblematic in this context since the coverage you want is for the related securities or breach of fiduciary duty suit claim and not for an underlying claim for COVID-19 caused bodily injury.

One more consideration might be enforcement actions by government regulators. My colleague, D&O coverage expert Gil Isidro, said that, "Enforcement actions may come from regulators alleging violations of health and safety laws and regulations, consumer protection violations, environmental law violations, employment law violations, or other violations of law allegedly committed in connection with a company's response or failure to respond appropriately to the coronavirus outbreak."

A modern public company D&O policy will typically provide coverage for the legal expenses associated with a government's targeting of an individual director or officer. Modern public company D&O policies usually do not cover regulatory investigations of a corporate entity, while a private company D&O policy might, depending on the policy's language and the specific facts at hand.

2. COVID-19 is seriously interrupting my business. Can I make a claim against my business interruption insurance?

The answer is probably not. Business interruption coverage comes from your property policy, so the trigger of your business interruption insurance is a physical property loss. The fact that your supply chain is interrupted due to COVID-19 will not trigger the policy the way a fire burning down your factory would.

Consider, however, the situation in which your office or factory must be evacuated and disinfected because someone who had contracted COVID-19 came to work. Some law firms are arguing that sort of contamination might indeed trigger your property policy and provide you with business interruption coverage, which includes both lost profits and the costs associated with things like setting up an alternative workspace while your contaminated space is being remediated.

In a recent paper, the law firm Jones Day argues that what constitutes an underlying property loss may be unclear depending on how a policy was worded, not to mention a policy holder's particular jurisdiction, and as such, "[t]he determination of whether 'physical loss' has occurred will therefore continue to require a close examination of the particular facts of each case." I note here that this argument will be highly dependent on the wording of your policy, and many policies contain specific contamination exclusions.

There are some large limit/large premium policies that may have a low sublimit (meaning something less than the full limit of coverage under the policy) that will pay out if your office or factory is shut down due to a communicable disease. While there may be some coverage in a highly customized policy, the sublimit will be very small compared to the overall limit (think something like a $100,000 to $1 million sublimit on a billion-dollar property limit). The vast majority of property policies, however, will not have this explicit coverage, even on a low sublimited basis.

Another theory for coverage that may emerge for a business interruption policy will be if civil authorities shut down access to your property due to physical damage caused by an insured peril . Typically, the civil authority coverage would only apply if the peril in question is covered (e.g. If the civil authority blocks access to your property due to the threat of fire, you would have coverage. On the other hand, there is typically no coverage if the issue causing the civil authority to take action is the coronavirus because communicable disease is likely not a trigger for coverage under your property policy). If you do have this communicable disease coverage, it is again likely to be only a small sublimit of coverage. Carriers providing coverage for this event typically limit the coverage to owned and or occupied locations that are actually infected (not potentially infected).

March 20, 2020 UPDATE: Woodruff Sawyer recommends that clients track any expenses associated with the business interruption and strongly consider reporting the claim to your insurer if you have incurred a loss. The situation is fluid, and new opportunities for coverage may emerge. Numerous coverage attorneys have taken the position that, depending on the specific wording of your policy, there may be opportunities for coverage. Also, with New Jersey leading the charge, there is a growing trend of state legislature's introducing legislation to declare business interruption claims covered notwithstanding relevant policy exclusions. Finally, claims can develop over time in ways that may open the possibility of coverage. It is a best practice to track expenses associated with the pandemic to support future documentation (recreating records after the fact is never as good as contemporaneous record-keeping). Also, this documentation may be useful as more people call for government intervention to help businesses.

Of course, there are ways that insurance might respond to the coronavirus (assuming there is no clear virus-type exclusion, which many policies have) that don’t involve a property policy. For example, take the hypothetical situation where an insured has manufactured products that are “damaged” with a virus. The damage to the products may be covered by a type of policy designed to cover your goods in transit or in storage. In some cases, the resulting loss of profit might also be covered as well. However, keep in mind if the public does not want to buy the products because they came from what is now regarded as a stigmatized location, but there is no evidence that the products are in fact damaged, it is unlikely that an insurance policy would respond.

It should be noted that there are industry-specific, specialized policies that contemplate coverage in the case of a problem involving a communicable disease. For example, someone in the hospitality or healthcare industry might have this coverage. These specialized policies may not need an underlying property loss to be triggered.

A "business interruption"-type policy that does not require a property loss is a trade disruption policy. These policies are expensive and would respond if your business were interrupted by the coronavirus (assuming they were purchased before the recent outbreak). Now that the disruption caused by the coronavirus is already here, new trade disruption policies will be written to exclude this particular risk. (In case you are wondering, these policies are not triggered by tariff fights.)

What about if a government is the reason trade is interrupted? There may be some coverage under a political risk policy depending on how the policy is worded, and again, only if you already had one in place before the coronavirus situation developed.

3. Is there an insurance response if my employees become ill?

As you expect, the health insurance you provide employees would be expected to respond to the coronavirus as it would any other illness.

If an employee contracts COVID-19 as a result of a work-related activity, your liability to your employee is covered by your no-fault workers' compensation policy, with each state dictating the level by statute. Whether something is a work-related activity can be an open question. If something isn't a work-related activity, an employer wouldn't be liable for the harm caused by the activity.

The caveat to that is if you put your employees in harm's way in a manner that is inconsistent with their normal job, the employee might sue you for having created an unsafe work environment. This suit would be covered by your employer's liability insurance, i.e. Part B of workers' compensation insurance. There is no statutory cap for this liability exposure, however, and the ability to recover from insurance is subject to the limit purchased, including any umbrella/excess liability. It should be noted that these types of suits are not often successful. In addition to the limit of insurance provided by your employer's liability insurance, your corporation's umbrella liability policy is part of the limit of insurance you purchase to cover this type of exposure.

This is a good time to double-check that you have a good Business Travel Accident (BTA) policy in place. These policies provide important benefits for your employees when they travel and need things like a medical evacuation. BTA policies are agnostic as to the medical reason and include a network of providers that can be relied upon when an employee is outside their normal network.

4. Is there an insurance response if a customer says that my product gave him the coronavirus?

Should a suit like this arise, the products liability portion of your general liability policy would respond. Going forward, however, it's a good idea to keep an eye on the language in these policies to ensure that no new viral/bacterial exclusions pop up, causing a problem in the future.

While somewhat operational, these are all good questions for a board to ask as part of its role when it comes to overseeing a company's enterprise risk management efforts. And certainly, when a board asks these types of questions, it may be helpful to have board meeting minutes that reflect the board's diligence in this regard.