February 22, 2024
March 25, 2020
Though most initial COVID-19 insurance-related analysis is focusing on first-party insurance, companies should also review their third-party insurance coverage in response to this pandemic. Non-public companies would be well-advised in this review not to overlook directors and officers (“D&O”) insurance, which often provides quite broad liability coverage to such companies. Although D&O coverage for public companies is generally limited to “securities claims,” coverage for non-public companies generally includes any “claim” against the company not otherwise excluded.[1] This broad coverage grant could prove extremely valuable for many non-public companies, given the volume and variety of lawsuits likely to result from COVID-19.
However, despite the broad coverage promised by these policies, insurers facing daunting liabilities from this pandemic may have strong incentives to refuse coverage for COVID-19-related claims. In particular, insurers may assert that exclusions pertaining to bodily injury and pollution bar D&O coverage for any claims related to this virus. Non-public companies that respond by closely examining the precise terms of their D&O policy, bearing in mind that exclusions must be read narrowly and construed against insurers, will largely conclude that these exclusions will not defeat coverage.
A bodily injury exclusion is found in most non-public company D&O policies, but this exclusion should not apply to most COVID-19-related claims. As an initial matter, this exclusion often only precludes claims “for bodily injury” (i.e., claims that directly seek recovery for a claimant’s bodily harm), but not claims tangentially related to bodily injury.[2] Further, even more broadly worded exclusions barring claims “arising out of bodily injury” or “in any way involving bodily injury” have been read narrowly by courts to apply only when the claim is sufficiently connected to a bodily injury. See, e.g., Fireman’s Fund Ins. Co. v. University of Georgia Athletic Ass’n, Inc., 654 S.E.2d 207, 211 (Ga. App. 2007) (holding that exclusion for any claim “in any way related to any Bodily Injury” did not apply because there was not a sufficient “nexus” between plaintiff’s injury and his claim that insured improperly failed to purchase disability insurance that would have covered his injury); Philadelphia Indem. Ins. Co. v. Maryland Yacht Club, Inc., 742 A.2d 79, 92 (Md. App. 1999) (holding that “nexus” between plaintiff’s injury and his claim that insured wrongfully terminated him for pursuing a workers compensation claim following the injury was insufficient to trigger exclusion for any claim “in any way involving . . . bodily injury”).
Similarly, most non-public company D&O policies contain a pollution exclusion, but for at least three reasons it ought not apply to most COVID-19-related claims. First, this exclusion is typically limited to claims concerning the “discharge” or “cleanup” of pollutants, which may not be at issue in a COVID-19-related lawsuit, even if the virus were treated as a pollutant. Second, while the definition of pollution and pollutant varies among policies, an express reference to viruses is not common and many courts limit even exclusions that broadly define pollution to apply only to “traditional environmental pollution” like industrial waste. Third, even where the definition of pollution includes the substance at issue in a claim and the exclusion is broadly worded, courts may apply the exclusion only if pollution, not other alleged misconduct, is the focus of the claim. See, e.g., Sealed Air Corp. v. Royal Indem. Co., 961 A.2d 1195, 1204 (N.J. App. Div. 2008) (holding that exclusion for claims “in any way involving” the discharge or cleanup of “Pollutants” did not apply to plaintiff’s claim alleging “misleading representations . . . pertaining to whether [insured] properly evaluated certain contingent liabilities regarding potential pollution liability,” because the “gravamen” of plaintiff’s claim “has its root in . . . misrepresentation, not pollution”).[3]
While these two exclusions will not categorically defeat D&O coverage for most non-public companies facing COVID-19-related claims, these companies should be aware that their D&O policies contain a number of other exclusions that may limit such coverage in certain instances. These exclusions include limits on claims concerning: (1) a company’s performance of professional services; (2) goods that are developed, manufactured, distributed, or sold by a company; (3) a breach of contract by a company (unless the company would have been liable in the absence of the contract); (4) disputes between insureds; (5) the company’s management of employee retirement funds; and (6) certain employment practices.[4] Whether these exclusions are present, and how they are worded, will vary among policies. As noted above, some will apply only to claims “for” excluded conduct while others will have broader introductory language, but each must be read narrowly and in favor of coverage, so insureds should closely scrutinize any denial based on one of these exclusions.
In short, non-public companies facing potential litigation related to COVID-19 should keep in mind that their D&O policies likely provide much broader coverage than just securities-related claims. While insurers may push back and exclusions may place certain limitations on coverage, these policies can still provide valuable protection against a range of COVID-19-related lawsuits that may arise against companies as this unprecedented situation unfolds.
[1] This broad coverage is also generally provided for the company’s directors, officers, and other employees. Public companies should also be aware that such broad coverage is typically provided to individuals insured under their D&O policies, even if coverage for the public company itself is much narrower.
[2] Most companies hold general liability insurance designed to respond to claims seeking recovery for bodily injury.
[3] Additionally, pollution exclusions often contain exceptions so that coverage is not precluded for securities-related claims. A number of the other exclusions discussed herein also sometimes contain a similar exception.
[4] Many companies purchase other lines of insurance—such as professional liability, products liability, fiduciary liability, and employment practices liability—that may provide coverage where D&O coverage is unavailable due to one of these exclusions.