Comment & AnalysisFeatures

How COVID-19 has impacted D&O coverage growth across Europe 

The European insurance market keeps growing at fast pace: the number of insured sectors and businesses is constantly increasing, and so is the variety of risks faced by clients that require prompt response from insurers (such as Cyber risks and exposures related to Climate Change and ESG issues, to name but a few).

As such, the market request for D&O insurance coverage is also growing steadily throughout Europe due to the significant increase of litigation involving the companies’ executives, often resulting in securities or derivative claims from shareholders. The effect of the Covid-19 pandemic outbreak is also an important factor to consider. It is too early to really appreciate what the impact of the Covid-19 virus will be on the D&O environment, but it is undoubtedly an area to start looking at more closely. 

When it comes to coverage exclusions, considering the significant increase of the number of insolvency proceedings deriving from the heavy impact of the pandemic crisis on the markets, one of the “hottest topics” of the post Covid-19 era in insurance is around D&O insurance coverage.

 It has presented a dilemma concerning whether or not insurers may include in their policies, specific exclusions aimed at carving out from coverage those liabilities for D&O claims which arise from or relate to the entering by the policyholder into some insolvency procedure, irrespective of whether such procedure started before or after policy inception. D&O policies generally include some limitations on coverage for illness and injury, but depending on the specific policy, these exclusions may not affect coverage for shareholders’ complaints related to this event.

In fact, the application of such a coverage exclusion in practice could lead to situations where the relevant D&O would lose his/her right to coverage as a consequence of circumstances falling outside his/her scope of control, regardless of how diligently the insured risk was represented at policy inception.

Regardless of whether D&O complaints come in the form of claims alleging breaches of law, mismanagement conduct or negligence, or rather under the scheme of some investigation, the current pandemic is likely to significantly affect the risk of litigation against D&Os. Potential plaintiffs may scrutinize the way Boards guide their companies through the pandemic crisis, whilst top management are being put under huge pressure to take wide-ranging decisions to protect the interests of various stakeholders under constantly changing circumstances.

A further factor playing a significant role in the progressive widening of the range of D&Os exposures is represented by the fact that many European countries have recently introduced in their legal systems, the possibility to bring claims through class actions or similar forms of collective actions. Albeit often under different schemes than those that have caused heavy losses to D&O portfolios overseas.

D&O policies, which were once considered as the answer to a “strictly American” problem, have quickly spread throughout Europe and in most cases, executives now regard them as a prerequisite for accepting their Board appointments. 

In fact, this type of coverage responds to the need for Board members and top managers to protect their personal assets against legal actions possibly made by third parties (including, in case of insolvency, their own companies’ receivers and liquidators) claiming damages as a result of the insureds’ errors, omissions and/or breaches of law, articles of association, regulations and specific proxies, provided that their misconducts are not malicious in nature.

The story of these type of policies in Italy is also quite peculiar. Now they have become a common feature within the context of Italian corporations’ management and control systems (with significant delay, if compared to the UK and overseas markets), however when D&O policies first appeared in the 1980s it was even questioned whether or not they were to be considered lawful under Italian law. In fact, some scholars feared that their scope of coverage could result in a potential threat to the effectiveness of the deterrent purpose of the applicable law provisions on third party liability of directors and officers.

The most popular D&O coverage available on the Italian market provide indemnity to both individual executives and their companies (with respect to the costs these may have incurred to hold their D&Os harmless from losses) under the schemes commonly known, respectively, as “Side A” and “Side B” warranties, while “Side C” warranty (also known as “entity coverage”) is not yet a common sight in Italy. In this respect, companies’ entitlement to hold their directors and officers harmless from the losses they incurred as a consequence of third-party claims for liability is generally found to be in line with the principle expressed under Article 1322 of the Italian Civil Code, providing that parties are free to enter into contracts different from those specifically set out by the Civil Code itself, to the extent that such contracts pursue interests that are worthy of protection.

On the contrary, Italian D&O litigation does not seem yet to be propelled by litigation funding, which in other jurisdictions often acts as a catalyst for the use of collective actions. This is mainly due to the fact that Italian Court proceedings are traditionally seen by foreign litigation funders as time-consuming, and therefore inconsistent with the goals typically sought by investors. In addition, potential local users (i.e., prospective claimants) are generally unaware of the features and opportunities of litigation funding.

That said, the applicable legal framework leaves room for resorting to litigation funding agreements in Italy, considering that these type of arrangements are not prevented by any mandatory law provision or public policy.

Matteo Cerretti is head of insurance for DWF in Italy. Matteo was recently recognised as Insurance Lawyer of the Year at the Legal Community ‘Forty under Forty’ Italy awards whilst DWF in Italy were also recognised as Insurance Firm of the Year at the Legal Community Corporate Awards

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