A couple days ago, the publisher of FC&S asked if we could weigh-in on the D&O insurance ramifications of the COVID-19 outbreak and related mass hysteria. As regular contributors, we immediately went to work interviewing insurance agents, brokers and risk managers across a wide range of industries. The opinions were far reaching but all predicted doom and gloom. There have already been plenty of articles published in various respected outlets and blogs, all with similar perspectives, except for one person who is an expert in D&O insurance. The following is a brief point of view of Contrarian, who prefers not to be identified.

Contrarian told us that  he is not currently planning on drafting an article about COVID-19 related D&O exposures, in large part for two reasons. First, as explained below, he does not currently think current events will directly generate many virus-related D&O claims,  although that could change if virus-related developments change dramatically in the coming weeks. In that event, our contact prefers not to have an article published now that downplays the D&O exposure.

Second, he cited too much ill-informed and reactionary hype about this D&O exposure. "It is easy to contend the sky is falling and D&O claims will be rampant, but I don't accept that premise (at least not now). People quoted in various exiting articles on the subject are good examples of that. I prefer not to get involved in that hysteria" Contrarian says.

There will obviously be some companies that encounter D&O claims directly attributable to the virus and those claims  may be covered under D&O policies, providing the lawsuit allegations fit the policy's definition of "wrongful act". However, Contrarian does not currently foresee those claims having enough frequency and severity to materially impact the D&O market.

In Contrarian's words: "The more troubling exposure, which could materially impact the D&O market, is what I call the indirect virus-related D&O claims. For companies that had the bad luck of disclosing over the last few weeks some disappointing news to investors (unrelated to the virus), there is a high likelihood that securities class actions will be filed against virtually all of those companies because of the very large drop in the market price for the company's stock on the day of the adverse disclosure.

Plaintiff lawyers will contend those large stock drops in a company's stock price were caused by the disappointing and nonvirus disclosures by the company, and thus the potential damages in those nonvirus securities class actions are measured by that large stock drop (even though in reality the large stock drop was not attributable to the nonvirus disclosure but instead attributable to the market's overall concerns about the impact of the virus on the economy as a whole).

Although defendants' damages expert in the securities class action will be able to persuasively contend the large stock drop was not attributable to the "corrective" nonvirus disclosure and thus recoverable, plaintiffs will still be able to argue that their potential recoverable damages are enormous and thus a settlement of the securities class action should be very large.

I foresee a relatively large number of these "indirect" securities class actions (which don't allege anything relating to the virus, but which use the large market volatility caused by the virus to create damages). Because these cases could give rise to many large settlements (despite the lack of merit in the cases, but considering the very large potential damages), these types of indirect cases could materially impact the D&O insurance market."

As with the virus itself only time will tell. We will report back if the preliminary predictions of Contrarian take a different turn. For the time being, we remain self-quarantined in the quiet solitude of our study before falling into a haunted, restless sleep.

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