COVID-19 has touched every aspect of our lives. While we focus on keeping ourselves, our families and our communities safe, we also have an obligation to be there for clients and to help guide insureds through a quickly evolving environment.
Making this even more challenging is that all this is taking place at a time when markets were already firming, particularly in the public Directors & Officers (D&O) space, and the private D&O and Employment Practices Liability Insurance (EPLI) markets in tougher states like California.
Prepared for more difficult renewals
Agents placing or renewing D&O and EPLI coverage should be prepared to answer new pandemic-related questions that will slow down the underwriting process. For public companies, the focus on public disclosures will increase as well as the underwriting examination of how the company is handling the impact of the virus and plans to do so going forward.
A particularly challenging question we are starting to see is whether the insured has any intentions of revising go-forward guidance. Guidance, itself, is often a tricky subject: How much is too much or too little? Trying to assess changes in guidance when so much about COVID-19 remains uncertain is challenging, to say the least.
If your clients are in industries uniquely susceptible to the market impact of COVID-19, such as hospitality, retail, entertainment (and this list is certainly not exhaustive), then the challenges are even more acute.
Elsewhere in your book of business
No less important will be preparation for your private company clients. While they do not have the disclosure issue, they should expect more scrutiny of the future impact on the underlying business itself.
Private D&O fundamentally looks at financial stability: Is the company at risk of going bankrupt in the next 12 to 18 months? For those clients that had shakier finances before this coronavirus episode, we would recommend extra time spent consulting them to ensure there is a credible story to present to the markets. This includes not only plans for future funding, but the ability to manage current debt (e.g., maturity schedules, compliance with covenants) and the potential assistance provided by the CARES Act. The more information, the better.
On the EPLI front
It is important to understand in advance the likelihood of a reduction in EPLI force. Those are red flag events in normal times, and we are already seeing wholesale reductions in hard-hit industries. Some important questions to ask include:
- Is it directly related to COVID-19, or was it part of a planned restructuring of the business?
- Was outside counsel involved in preparation for the reduction?
- Were severances paid in return for a release of claims?
- What are the plans to rehire once the recovery begins?
Some of these questions will be difficult to answer, but the involvement of outside counsel is key. This may not prevent you from being sued, but strong controls and proper guidance and procedures are important elements to helping get any lawsuit dismissed.
For companies with 100 or more employees, do not forget about their notice obligations under the WARN Act (the Worker Adjustment and Retraining Notification Act).
Finally, as a reminder, many private company policies include EPLI loss control services at no extra expense, so we encourage they be used.
The unfolding slowdown
Signs of an economic slowdown began soon after government shelter-in-place policies. Part of this is pure logistics, as carriers can no longer just talk through a deal approval. Instead, organizing schedules and round-table discussions simply take more time to arrange. Part of this is also substantive, given the difficult questions that may arise. And, of course, the impact on certain industries will be worse.
We are also starting to see resistance to extensions, so do not assume that they will be easily granted. A number of carriers have expressed that while they understand the desire to extend, the resulting backlog could overload their ability to process renewals later in the year. They can still be obtained, but it will be helpful if we have tangible reasons from the insured.
The impact will vary greatly by class of business and jurisdiction. Public D&O is a mess. Renewals were taking much longer before COVID-19, and that’s only expected to get worse. Private renewals in states like California were already seeing meaningful pressure on rates and retentions, particularly for EPLI.
Your financially stable clients, who have the ability to ride this out and are in more defendant-friendly jurisdictions, will hopefully face a drama-free renewal. But it’s important to be prepared for the ones you know will be more challenging.
Potential coverage changes
The importance of locking in the right coverage will only increase as the pandemic unfolds. We have seen certain markets add COVID-19/pandemic-type exclusions, but it’s not necessarily a widespread movement. The impact will vary between public and private companies, with the latter more likely to see these types of exclusions added.
The most relevant current exclusion that may be implicated is the Bodily Injury exclusion, which is common to D&O policies, both public and private. It is doubtful that it will be removed, but we should ensure that it has the appropriate structure where possible, including the right introductory wording and carve backs for non-indemnified loss, securities claims and defense costs. Not every market will offer all of these carve backs, but we need to be aggressive in our requests as a matter of simple professional due diligence.
Manny Cho ([email protected]) is executive vice president of RPS Executive Lines. A version of this piece published first on the RPS website. It is reproduced here with permission. These opinions are the author’s own.