COVID-19 Stirs Up an Already Murky Outlook for D&O; Industry Experts Weigh In

When it comes to COVID-19 economic damage, some industries have been hit much harder than others. D&O underwriters are sure to be asking COVID-19-specific questions at renewals.
By: | April 16, 2020

Well before the current coronavirus pandemic, the D&O marketplace was hardening.

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Now, a pair of coronavirus-related class action lawsuits, one against a pharmaceutical manufacturer and one against a cruise ship line, may herald a wave of D&O litigation. Combined with the economic slowdown caused by the pandemic, this could mean a D&O marketplace that’s even tougher than anticipated.

“Coming into January, we knew we were going to be looking at potentially less capacity in the D&O marketplace,” said Christine Williams, CEO at Aon Financial Services Group.

“I think that trend’s now going to continue. You have insurers who are just managing their aggregate capacity, whether it’s in the U.S., London or Bermuda. That’s something we were worried about January 1, and we’re probably a little bit more worried now, because we do suspect that insurers are going to move away from certain classes of business.”

Renewals and Exclusions to Prep For

Rob Yellen, D&O and fiduciary liability insurance product leader with Willis Towers Watson, agrees: “Renewals this year are largely going to be difficult.

Rob Yellen, fiduciary liability products leader, Willis Towers Watson

“We were in an already firming D&O market, with pressure on rates and insurers pulling back on the amount of capacity they would extend to D&O,” Yellen explained. “There was already enormous pressure on companies for this year’s renewal, and now we have COVID-19 on top of it. It didn’t cause it, but it made it worse.”

One consequence of this could be a broadening of exclusions.

“Up until the last few months, D&O generally has been so competitive that if you were to put some types of exclusions on, you would be effectively taking yourself out of competition for that account,  because there would be so many alternatives available,” said Kevin LaCroix, executive vice president at RT Specialty’s RT ProExec division.

“However, the marketplace was already tightening significantly before the coronavirus outbreak, and now with the disruption of the coronavirus, restrictions that might not have flown in the past may now be unavoidable.”

Williams expects that those exclusions may be directly focused on COVID-19.

“I do think there are going to be insurers that are going to try to put on COVID exclusions, which could be very broad,” he said.

“I don’t think anybody’s going to be looking to change the breadth of the traditional coverage that you get under a D&O policy, but I do think it’s going to be more challenging for certain insureds, and that’s going to continue for the next few months.”

So far, though, Yellen hasn’t seen those exclusions: “We’re not really seeing D&O insurers looking to exclude COVID-19,” he said.

“Some carriers have asked in a specific context, but we haven’t seen anything stick that has a specific COVID-19 exclusion. But we have seen concerns about liquidity. There is a lot of pressure on carriers not to pick up the next bankruptcy if they can avoid it.”

Individual Industries Take the Hardest Hits

Impacts could vary greatly by industry.

Kevin LaCroix, EVP, RT ProExec division, RT Specialty

“We’ve already seen that, as a result of the disparate impact on different kinds of companies … different sectors have become more suspect,” said LaCroix.

“Airlines, hotels, casinos, cruise lines, movie theaters, restaurants chains — there are a number of industries that are being disproportionately impacted by this, although obviously there are some industries that are doing better — teleconferencing services, Campbell soup, Amazon. So it’s playing out differently in different segments of our economy. The underwriters are very aware of that, and that has changed how they are responding to submissions depending on industry.”

That said, the impacts may still be broad. “Everybody’s going to have exposure,” said Williams. “No one’s going to be immune.”

A Silver Lining?

Still, for many insureds, the pandemic won’t make things worse than they were already poised to be.

“Luckily, so far we have seen few knee-jerk reactions from insurers,” Yellen said.

“They seem to be looking at things on a case-by-case basis. For some accounts, the change year-over-year won’t be out of line with last year’s projections, compared to those that have been impacted, [like] targeted segments, companies exposed to liquidity concerns or indirectly targeted, those with supply chains impacted or who face issues downstream.”

But as impacts of the slowdown spread to more industries, insurers could become more broadly concerned. “You might also see that with the bankruptcy situation, certain vendors declare bankruptcy and that may have a cascading effect,” said Yellen.

“It’s not just the cruise lines, but all their suppliers and vendors.”

Conducting Business in COVID-19’s Wake

The coronavirus may also impact how insurers do business.

“Several D&O insurers have introduced COVID-19 questionnaires, asking about the company’s response to the coronavirus and how it’s impacting their operations,” said LaCroix.

“And I expect that to continue. I expect it to become more widespread, and I suspect there will be a lot more financial underwriting as underwriters seek to determine whether a company that in the past may have been financially solid may become financially weaker and even an insolvency candidate as a result of cash flow interruptions, things like that.”

Brokers and insureds may have to change their approach, as well.

“I think it’s going to be increasingly difficult to build a large program of $500-$600 million of full ABC coverage,” said Williams. “You have insurer capacity potentially going out of the market and not enough capacity coming in. So I think the ways the programs are structured are going to be looking different.”

Williams also sees an increase in more creative program structures.

“Insurers will be asking for clients to have more skin in the game, particularly on retention,” Williams said. “Co-insurance is something else that we’ve been seeing and an exploration of captives and reinsurance for some larger deals.”

For the moment, most companies should be well covered by their current D&O policy.

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“We’ve been in a competitive marketplace for really 20 years or close to it,” said LaCroix.

“And during that time, competition has broadened the scope of coverage, narrowed the exclusions, made the terms and conditions relatively more policyholder-friendly than before.

“So the potential good news is, for many organizations that might experience a D&O claim, if they had D&O cover in place, they’re going to have relatively broad cover to respond, including relatively broad entity liability coverage,” he said. “So just as a general matter, I think many companies will be able to turn to their D&O coverage for protection in the event of a D&O claim arising out of this, but ultimately the insurance companies will make their coverage determinations based on the policy wording and facts and circumstances of each claim.”

But Yellen advises that how insureds handle claims now could help or hurt them at renewal time.

“The bigger challenge is not how to change their business or resolve the financial challenges, the bigger issue is how do you tee yourself up for renewal, how do maximize the value of your insurance?” said Yellen.

“And that means understanding when you have a claim against you. Today’s D&O products are really well refined and broad and may encompass things you may not expect. It may trigger obligations under the policy that, if not met, could jeopardize coverage not just for the claim in question, but also going forward.” &

Jon McGoran is a magazine editor based outside of Philadelphia. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Scenario

The Betrayal of Elizabeth

In this Risk Scenario, Risk & Insurance explores what might happen in the event a telemedicine or similar home health visit violates a patient's privacy. What consequences await when a young girl's tele visit goes viral?
By: | October 12, 2020
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

PART ONE: CRACKS IN THE FOUNDATION

Elizabeth Cunningham seemingly had it all. The daughter of two well-established professionals — her father was a personal injury attorney, her mother, also an attorney, had her own estate planning practice — she grew up in a house in Maryland horse country with lots of love and the financial security that can iron out at least some of life’s problems.

Tall, good-looking and talented, Elizabeth was moving through her junior year at the University of Pennsylvania in seemingly good order; check that, very good order, by all appearances.

Her pre-med grades were outstanding. Despite the heavy load of her course work, she’d even managed to place in the Penn Relays in the mile, in the spring of her sophomore season, in May of 2019.

But the winter of 2019/2020 brought challenges, challenges that festered below the surface, known only to her and a couple of close friends.

First came betrayal at the hands of her boyfriend, Tom, right around Thanksgiving. She saw a message pop up on his phone from Rebecca, a young woman she thought was their friend. As it turned out, Rebecca and Tom had been intimate together, and both seemed game to do it again.

Reeling, her holiday mood shattered and her relationship with Tom fractured, Elizabeth was beset by deep feelings of anxiety. As the winter gray became more dense and forbidding, the anxiety grew.

Fed up, she broke up with Tom just after Christmas. What looked like a promising start to 2020 now didn’t feel as joyous.

Right around the end of the year, she plucked a copy of her father’s New York Times from the table in his study. A budding physician, her eyes were drawn to a piece about an outbreak of a highly contagious virus in Wuhan, China.

“Sounds dreadful,” she said to herself.

Within three months, anxiety gnawed at Elizabeth daily as she sat cloistered in her family’s house in Bel Air, Maryland.

It didn’t help matters that her brother, Billy, a high school senior and a constant thorn in her side, was cloistered with her.

She felt like she was suffocating.

One night in early May, feeling shutdown and unable to bring herself to tell her parents about her true condition, Elizabeth reached out to her family physician for help.

Dr. Johnson had been Elizabeth’s doctor for a number of years and, being from a small town, Elizabeth had grown up and gone to school with Dr. Johnson’s son Evan. In fact, back in high school, Evan had asked Elizabeth out once. Not interested, Elizabeth had declined Evan’s advances and did not give this a second thought.

Dr. Johnson’s practice had recently been acquired by a Virginia-based hospital system, Medwell, so when Elizabeth called the office, she was first patched through to Medwell’s receptionist/scheduling service. Within 30 minutes, an online Telehealth consult had been arranged for her to speak directly with Dr. Johnson.

Due to the pandemic, Dr. Johnson called from the office in her home. The doctor was kind. She was practiced.

“So can you tell me what’s going on?” she said.

Elizabeth took a deep breath. She tried to fight what was happening. But she could not. Tears started streaming down her face.

“It’s just… It’s just…” she managed to stammer.

The doctor waited patiently. “It’s okay,” she said. “Just take your time.”

Elizabeth took a deep breath. “It’s like I can’t manage my own mind anymore. It’s nonstop. It won’t turn off…”

More tears streamed down her face.

Patiently, with compassion, the doctor walked Elizabeth through what she might be experiencing. The doctor recommended a follow-up with Medwell’s psychology department.

“Okay,” Elizabeth said, some semblance of relief passing through her.

Unbeknownst to Dr. Johnson, her office door had not been completely closed. During the telehealth call, Evan stopped by his mother’s office to ask her a question. Before knocking he overheard Elizabeth talking and decided to listen in.

PART TWO: BETRAYAL

As Elizabeth was finding the courage to open up to Dr. Johnson about her psychological condition, Evan was recording her with his smartphone through a crack in the doorway.

Spurred by who knows what — his attraction to her, his irritation at being rejected, the idleness of the COVID quarantine — it really didn’t matter. Evan posted his recording of Elizabeth to his Instagram feed.

#CantManageMyMind, #CrazyGirl, #HelpMeDoctorImBeautiful is just some of what followed.

Elizabeth and Evan were both well-liked and very well connected on social media. The posts, shares and reactions that followed Evan’s digital betrayal numbered in the hundreds. Each one of them a knife into the already troubled soul of Elizabeth Cunningham.

By noon of the following day, her well-connected father unleashed the dogs of war.

Rand Davis, the risk manager for the Medwell Health System, a 15-hospital health care company based in Alexandria, Virginia was just finishing lunch when he got a call from the company’s general counsel, Emily Vittorio.

“Yes?” Rand said. He and Emily were accustomed to being quick and blunt with each other. They didn’t have time for much else.

“I just picked up a notice of intent to sue from a personal injury attorney in Bel Air, Maryland. It seems his daughter was in a teleconference with one of our docs. She was experiencing anxiety, the daughter that is. The doctor’s son recorded the call and posted it to social media.”

“Great. Thanks, kid,” Rand said.

“His attorneys want to initiate a discovery dialogue on Monday,” Emily said.

It was Thursday. Rand’s dreams of slipping onto his fishing boat over the weekend evaporated, just like that. He closed his eyes and tilted his face up to the heavens.

Wasn’t it enough that he and the other members of the C-suite fought tooth and nail to keep thousands of people safe and treat them during the COVID-crisis?

He’d watched the explosion in the use of telemedicine with a mixture of awe and alarm. On the one hand, they were saving lives. On the other hand, they were opening themselves to exposures under the Health Insurance Portability and Accountability Act. He just knew it.

He and his colleagues tried to do the right thing. But what they were doing, overwhelmed as they were, was simply not enough.

PART THREE: FALLING DOMINOES

Within the space of two weeks, the torture suffered by Elizabeth Cunningham grew into a class action against Medwell.

In addition to the violation of her privacy, the investigation by Mr. Cunningham’s attorneys revealed the following:

Medwell’s telemedicine component, as needed and well-intended as it was, lacked a viable informed consent protocol.

The consultation with Elizabeth, and as it turned out, hundreds of additional patients in Maryland, Pennsylvania and West Virginia, violated telemedicine regulations in all three states.

Numerous practitioners in the system took part in teleconferences with patients in states in which they were not credentialed to provide that service.

Even if Evan hadn’t cracked open Dr. Johnson’s door and surreptitiously recorded her conversation with Elizabeth, the Medwell telehealth system was found to be insecure — yet another violation of HIPAA.

The amount sought in the class action was $100 million. In an era of social inflation, with jury awards that were once unthinkable becoming commonplace, Medwell was standing squarely in the crosshairs of a liability jury decision that was going to devour entire towers of its insurance program.

Adding another layer of certain pain to the equation was that the case would be heard in Baltimore, a jurisdiction where plaintiffs’ attorneys tended to dance out of courtrooms with millions in their pockets.

That fall, Rand sat with his broker on a call with a specialty insurer, talking about renewals of the group’s general liability, cyber and professional liability programs.

“Yeah, we were kind of hoping to keep the increases on all three at less than 25%,” the broker said breezily.

There was a long silence from the underwriters at the other end of the phone.

“To be honest, we’re borderline about being able to offer you any cover at all,” one of the lead underwriters said.

Rand just sat silently and waited for another shoe to drop.

“Well, what can you do?” the broker said, with hope draining from his voice.

The conversation that followed would propel Rand and his broker on the difficult, next to impossible path of trying to find coverage, with general liability underwriters in full retreat, professional liability underwriters looking for double digit increases and cyber underwriters asking very pointed questions about the health system’s risk management.

Elizabeth, a strong young woman with a good support network, would eventually recover from the damage done to her.

Medwell’s relationships with the insurance markets looked like it almost never would. &

Bar-Lessons-Learned---Partner's-Content-V1b

Risk & Insurance® partnered with Allied World to produce this scenario. Below are Allied World’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

The use of telehealth has exponentially accelerated with the advent of COVID-19. Few health care providers were prepared for this shift. Health care organizations should confirm that Telehealth coverage is included in their Medical Professional, General Liability and Cyber policies, and to what extent. Concerns around Telehealth focus on HIPAA compliance and the internal policies in place to meet the federal and state standards and best practices for privacy and quality care. As states open businesses and the crisis abates, will pre-COVID-19 telehealth policies and regulations once again be enforced?

Risk Management Considerations:

The same ethical and standard of care issues around caring for patients face-to-face in an office apply in telehealth settings:

  • maintain a strong patient-physician relationship;
  • protect patient privacy; and
  • seek the best possible outcome.

Telehealth can create challenges around “informed consent.” It is critical to inform patients of the potential benefits and risks of telehealth (including privacy and security), ensure the use of HIPAA compliant platforms and make sure there is a good level of understanding of the scope of telehealth. Providers must be aware of the regulatory and licensure requirements in the state where the patient is located, as well as those of the state in which they are licensed.

A professional and private environment should be maintained for patient privacy and confidentiality. Best practices must be in place and followed. Medical professionals who engage in telehealth should be fully trained in operating the technology. Patients must also be instructed in its use and provided instructions on what to do if there are technical difficulties.

This case study is for illustrative purposes only and is not intended to be a summary of, and does not in any way vary, the actual coverage available to a policyholder under any insurance policy. Actual coverage for specific claims will be determined by the actual policy language and will be based on the specific facts and circumstances of the claim. Consult your insurance advisors or legal counsel for guidance on your organization’s policies and coverage matters and other issues specific to your organization.

This information is provided as a general overview for agents and brokers. Coverage will be underwritten by an insurance subsidiary of Allied World Assurance Company Holdings, Ltd, a Fairfax company (“Allied World”). Such subsidiaries currently carry an A.M. Best rating of “A” (Excellent), a Moody’s rating of “A3” (Good) and a Standard & Poor’s rating of “A-” (Strong), as applicable. Coverage is offered only through licensed agents and brokers. Actual coverage may vary and is subject to policy language as issued. Coverage may not be available in all jurisdictions. Risk management services are provided or arranged through AWAC Services Company, a member company of Allied World. © 2020 Allied World Assurance Company Holdings, Ltd. All rights reserved.




Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]