As reviewed previously, the impact on Covid-19 losses will result in a steep increase in insurance claims under business interruption, public liability, product liability, employer’s liability, asset management, directors and officers, professional liability, errors and omissions, and marine insurance policies.
The UK Government recently announced that it will make changes to insolvency legislation to do “whatever it takes” to save businesses. The two main areas of change are the introduction of a short debt moratorium for UK companies undergoing a rescue or restructure; and a temporary suspension of wrongful trading legislation, retrospectively from 1 March 2020 for three months (click here to read more about these measures).
However, the fact remains that whatever measures are adopted, the adverse impact of the Covid-19 crisis on business activities will expose many company directors to insolvency-related claims. As a result, the likely impact of the Covid-19 outbreak on directors and officers (D&O) insurance policies will create several areas of uncertainty for both policyholders and insurers.
D&O insurance coverage
D&O insurance will usually include coverage for losses and legal defence costs relating to certain claims against the company, its directors, officers and managers.
Liquidators and administrators may commence legal proceedings against past and current directors, including claims for wrongful trading, fraudulent trading, misfeasance, and breach of fiduciary or other duty.
After insolvent liquidation or insolvent administration takes place, D&O insurance will usually continue to cover claims against former directors brought by liquidators and administrators as well as claims by creditors and any derivative actions by shareholders brought in the name of the company.
Section 214 of the Insolvency Act 1986 provides that a liquidator or administrator may apply for a court order to compel a director or former director to make a financial contribution to the company if, before the commencement of the winding up of the company, the director “knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration”.
Section 214 also makes former directors personally liable for any failing to take every step which ought to have been taken, with the aim of minimising the potential loss to the company's creditors. As a result of the uncertainties created by the Covid-19 outbreak, there is an increased risk of wrongful trading claims against former directors, despite the difficult and uncertain economic climate.
The retroactive effect of the proposed amendments to the legislation, from 1 March 2020, may protect some directors who may have continued trading when the company was already insolvent but, at that time, the director was not aware of the full economic impact of the Covid-19 crisis on the company.
However, directors will continue to be liable for other breaches of fiduciary and statutory duties owed to the company or its creditors, such as those relating to fraudulent trading, misfeasance and director disqualification proceedings.
D&O insurance exclusions
Different policy terms will result in different coverage outcomes regarding the indemnification of a claim which is made against a director or former director after the insolvency of the company due to the Covid-19 crisis.
Some policies have exclusions for “fraudulent acts” of directors. As a consequence, liquidators and administrators will need to be careful when deciding what claims may be advanced against former directors. For instance, policy coverage may be denied where the claim against a former director alleges that they committed a fraudulent act if there is a fraudulent acts exclusion.
Further, some policies have “insured against insured” exclusions which usually provide that insurers are not liable to pay any losses relating to a claim commenced by one insured against the company or other insured person. Depending on the policy language, the “insured against insured” exclusion may deny coverage for any claim by a liquidator or administrator commenced on behalf of an insolvent company against its former director, since both parties are insureds under the D&O policy (see: Scottsdale Insurance Co. v. Nationwide Medical, Inc., et. al., Case No. 15-436-DDP, C.D. Ca., 13 December 2017).
A possible “insolvency” write-back of coverage in the “insured against insured” exclusion may provide coverage for claims commenced by the company against a former director after the company has become insolvent.
There may also be an exclusion in the D&O policy for intentional or deliberate acts of directors. This may apply, for instance, if the director was aware that the company was clearly insolvent but decided to continue trading.
A detailed legal analysis of the relevant exclusions must be carefully undertaken to determine their scope of application.
More generally, any important decisions which directors are required to make in times of crisis must be fully documented and reasoned in writing (see: Biltmore Associates, LLC v. Twin City Fire Ins. Co., 572 F.3d 663, 9th Cir. 2009; Nicholson and another v Fielding and others  All ER (D) 156 (Oct)).
In addition, the courts will be reluctant to second-guess commercial decisions of directors which are taken with the benefit of well-reasoned written advice from independent professional experts.