In March, we reported on the initial filing of several securities law cases arising from the coronavirus pandemic (COVID-19). For example, the shareholders of Norwegian Cruise Lines Holdings, Ltd. at the beginning of the pandemic a class action lawsuit alleging that the company and some executives violated the Securities and Exchange Act of 1934. The lawsuit alleges that the cruise ship made false and misleading statements about COVID-19 to persuade consumers to buy cruises. This allegedly caused the share prices to be reduced by half.
As we predicted, the Norwegian lawsuit marked the beginning of these event-driven securities claims. Since then, close to 20 securities cases have been filed, arising directly or indirectly from COVID-1
D&O insurances are primarily designed to protect board members and officers from personal liability for claims arising out of their work for the insured company. D&O policies cover both when the insured person indemnifies the individual director or salaried employee – then advance costs for the individual director or salaried employee that the insured company would otherwise pay and cover all judgments or settlements that the insured company would otherwise reimburse – and when the insured company cannot harm or defend the director or official due to company policy, financial position or applicable law.
Most D&O insurances also provide "unit coverage", which insures the insured company for claims directly against it. For public companies, the unit's coverage is usually limited to coverage for "Securities Claims", while private companies' D&O policies usually provide broader coverage for a range of claims arising from the company's alleged misconduct. In fact, D&O policies are not standardized standards like certain commercial real estate or general liability policies, but they differ in terms of coverage, exceptions that have been used and additions added.
Although public company D&O policies limit the entity's coverage to "Securities Claims", the definition of "Securities Claims" used is generally defined as any claim that constitutes an actual or alleged violation of state or federal securities laws. Many guidelines go a step further and include affirmative action against shareholders' derivatives, claims for breach of the administrative obligation, government or government investigations and the issuance of lawsuits covered by "Security Claims". Such definitions should be broad enough to apply to recent pandemic-related securities claims.
While the latest securities claims are directly or indirectly related to a new and unique worldwide pandemic, the claims themselves are exactly what D&O Liability Insurance was designed to cover. In June, for example, shareholders in Co-Diagnostics, a molecular diagnostics company, filed an alleged class action lawsuit against the company and individual board members, claiming that the company incorrectly stated that its COVID test was 100% accurate. Co-Diagnostics was among the medical companies that worked to develop coronavirus tests. According to the complaint, share prices fell significantly when questions about the product's accuracy arose. This led to a lawsuit focusing on the company's inaccuracies about the COVID-19 related product. The complainant alleges that co-diagnosis violates section 10 (b) of the Securities and Exchange Act of 1934 and Rule 10b-5 issued therein, as well as section 20 (a) of the Exchange Act (arguing that the individual directors and officials were "Controlling persons"). in Co-Diagnostics, as defined in the law). In another case, shareholders in Zoom Video Communications, Inc. sued the company and its CEO and CFO for alleged inaccuracies about the database's privacy and security measures. While COVID-19 did not create deficiencies in the software, the complaint claims that the pandemic brought forward the deficiencies. The complaint alleges that the defendants made incorrect and misleading statements about the company's business, operations and compliance policies, specifically that the defendants incorrectly presented or failed to disclose that Zoom had insufficient data protection and security measures in place.
These statements are stereotypical. "Security claims" covered by a D&O policy: both allege alleged misconduct by the company and by insured board members and salaried employees acting in their capacity as such. D&O policies usually define “wrongful act” with respect to entity coverage as “any actual or alleged act, error, omission, omission, statement, inaccuracy or breach of administrative duty or any other obligation that the company has committed or is alleged to have committed or attempted. Here, both complainants claim incorrect statements or incorrect representations from the company, ie "incorrect documents." While the complaints allege fraud and deception, which, according to the insurer, may trigger a D & O policy "exclusion of conduct" that prohibits coverage for intentional dishonesty or fraudulent conduct, such allegations will not preclude the insurer's obligation to advance the insurance. Most exceptions to conduct, according to their terms, require that fraudulent conduct be determined by a final assessment in the underlying claim – unless and until the final assessment occurs, the exception may not apply. Furthermore, if the case is resolved before such an assessment, the exemption does not apply, and the insurer cannot evade its obligation to compensate the insured (s) for conciliation.
Although D&O insurance companies may attempt to rely on bodily injury and / or exclusion of contaminants to exclude coverage for pandemic or COVID-19 related securities suits, these exceptions should not prevent coverage either. These exceptions should simply not apply in a situation such as this where the claimed damages result from financial losses (ie reduced share prices) rather than bodily injury and / or pollution damage. Courts narrowly interpret the language of exclusion and place the burden of proof that all parts of the loss are excluded from the insurer. Insurers cannot meet this burden here when the claims try to recover for customs offenses and not for bodily injury or property damage. The "erroneous acts" alleged in securities claims are allegedly false, misleading or fraudulent statements about the company's management, operations or financial health; not acts of the company, board members or officials that cause bodily injury or pollution.
As we mentioned above, the shareholders in Norwegian Cruise Lines brought a suspected class action lawsuit against the company and certain officers who claimed that the company and the board members were making a significant mistake. and / or misleading statements and / or failure to disclose material adverse facts about the Company's operations, operations and prospects. Specifically, the complaint alleges that: (1) the company used sales tactics to provide customers with unproven and / or blatantly false statements about COVID-19 in order to entice them to purchase cruises, thereby endangering the lives of both their customers and crew members; and (2) as a result, the defendant's statements about the company's activities and activities were substantially false and misleading and / or lacked a reasonable basis at all times.
The allegations against Norweigan, while discussing the COVID-19 response, focused on and arise from alleged losses from Norway's alleged statements to the public rather than bodily harm to any plaintiff. Therefore, the exclusion of bodily harm should not apply, and the "loss" insured – defense costs and any settlement or judgment – does not arise from claims for bodily harm. In addition, many exemptions for personal injury in public companies' D&O policies contain explicit exemptions for securities claims such as this one.
Similarly, no exclusion of "pollutants" should apply. First, where "pollution" or "pollution" is not defined in the policy, policyholders should reject all proposals that the parties reasonably expected the term "pollution" to include a human disease or virus or that the clear meaning of the term "pollution" can be interpreted to include COVID-19. Second, the erroneous actions on which the claim is based will be misrepresentation, mishandling or other alleged errors that are distinct from the virus itself. As a result, the exemption should not apply. Thirdly, these exemptions often require "emissions, spread or discharges" of "pollutants", none of which concern the natural transmission of the disease between humans.
When considering coverage for pandemic-related security claims, both courts and policyholders should focus on the seriousness of the allegations in the complaint and the alleged legal basis for liability (usually management action or omission, or breach of customs, which does not affect shareholders' value). distracted by insurers' reservations to deny coverage based on conduct, bodily injury or exclusion of contaminants. In addition, the company's policyholders should consult experienced coverage advisers to carefully review any new claims about their renewal policy, as some insurance companies now insist on broad COVID-19 and / or pandemic exemptions for future insurance policies. Ultimately, the applicability of any exclusion will depend on the language used, but having broad D&O coverage will be important in defending against securities law complaints arising from alleged errors committed during the pandemic.