How COVID-19 affects Directors & Officers

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It is an anxious time for all businesses coping with the COVID-19 pandemic. In recent years, we have seen a wave of unrelated “event-driven” Directors and Officers (D&O) claims, arising from the likes of #MeToo, cyber incidents, and a variety of high profile accidents. Climate change related D&O claims may not be far away. Given this, it is not hard to imagine how a global pandemic and a corporation’s management or perceived mismanagement, including its corporate disclosures, could result in a D&O claim. Given the unprecedented events rapidly unfolding, whether such a claim would be successful is another matter.


Investors (and plaintiff law firms) will be watching closely as companies and their directors make announcements about the effect of COVID-19 on their business models. Clearly, companies and their directors cannot be liable just because the virus has a business impact: it came out of the clear blue sky and will impact every business in some way. It is what they say about the likely impact of the virus and the measures being taken to mitigate it that may give rise to a brush with securities laws.Companies will need to take great care in drafting communications about the virus and its possible consequences, particularly given this is a quickly developing situation with constantly changing horizons.


There is also the potential for mismanagement related claims against directors, namely, that the board was in breach of its fiduciary duties in failing to adequately address the risks and steer its company through the crisis with the least possible damage. In Australia, these could be framed as a breach of the duty to act with care and diligence (Section 180(1), Corporations Act 2001 (Cth) (the Corporations Act)),and there are similar or equivalent duties in virtually every other jurisdiction. Such claims could be brought by companies themselves, or via the derivative action process (in which a single shareholder can bring a claim on behalf of the company), or by liquidators following an insolvency. Directors may, however, seek to rely on the Business Judgment Rule under section 180(2)of the Corporations Act to demonstrate that they have met their obligations under Section 180(1).

Of course, directors of all companies are coping with extremely challenging conditions and complex problems on a scale that has not been seen before. Honest mistakes will be made by people doing their best.

The Federal Government and regulatory bodies are cognisant of the additional pressures being placed on business and have introduced a range of measures to support organisations as they navigate the changing landscape. These measures include; ASIC taking a “no action”position in relation to delays of up to two months in the holding of AGMs which were required to be held by 31 May 2020 and supporting the holding of those AGMs via “hybrid” and “virtual” meetings and the ASX introducing temporary measures to facilitate the raising of capital.

The ASX also released a compliance update on 31 March 2020 in relation to COVID-19 and Continuous Disclosure Obligations.Whilst the ASX notes that “a listed entity’s continuous disclosure obligations do not extend to predicting the unpredictable”, practical guidance is afforded to enable ongoing compliance with the obligation including strongly encouraging entities who have not reviewed their published guidance in light of COVID-19 to do so.

The Directors & Officers (D&O) Insurance

It is by no means inevitable that directors will be liable if sued; there may be strong defences, and it will be important to access defence costs coverage and/or any available indemnification from the company to ensure they are fully deployed. A securities class action arising from false or misleading disclosures or an alleged breach of the company’s continuous disclosure obligations or corporate mismanagement of a COVID-19 driven event would be the type of claim expected to be covered under a D&O policy.

As with any insurance policy, the specific facts and allegations of any claim will dictate coverage.

To be prepared, directors, officers and companies should proactively review their D&O insurance policies, in conjunction with their advisers, paying particular attention to any relevant exclusions and limitations.

In addition, D&O policies normally contain varying forms of a “bodily injury” exclusion limiting the extent of coverage for claims involving “bodily injury [other than emotional distress or mental anguish], sickness, disease, or death of any person, or damage to or destruction of any tangible property, including the loss of use thereof…”. The bodily injury exclusion is often narrowly framed so that it can only relate to direct injury claims of the type a general or public liability policy would be expected to cover.

The COVID-19 crisis will give rise to events that are covered under other corporate policies of insurance. Companies should be carefully examining these to check if and when they can make claims.Although not commonplace today, some D&O policies may contain a “failure to maintain insurance” exclusion. A failure of the company to maintain policies that could have mitigated losses for the company could be an obvious source of mismanagement claims against directors.

There is some speculation that certain insurers may look to add an “insolvency exclusion” to D&O policies in certain specific sectors perceived to be more likely to have an increase incorporate insolvencies. We will be looking to minimise the impact of such a clause should it be introduced.

Temporary relief from insolvency actions against directors

With effect from 24 March 2020, the Government enacted temporary changes to insolvency provisions contained within the Corporations Act. For a period of six months directors are provided within creased protections for debts incurred as a result of the corona virus health crisis.

Notwithstanding, directors must continue to assess the solvency of their company. They must continue to act with care,diligence and in good faith. Directors must not act fraudulently or dishonestly and, of course, any debt incurred remains payable.

Further details can be found here – virus-information-and-support-for-business/temporary-relief-for-financially-distressed-businesses

How can you secure the best D&O renewal terms

D&O insurers are still working through their own individual approach to assess the potential risks associated with COVID-19. Notwithstanding this, there is already a clear set of under writing concerns which have materialised. In assessing their preparedness to provide go-forward coverage, insurers will require satisfactory responses to the following three key areas of concern:


Financial standing

·        how strong is the balance sheet

·        how strong is the liquidity position of the organisation

·        how geared is the organisation and what covenants apply to debt/credit arrangements

·        how is the organisation protecting its revenue stream

·        (for publicly listed organisations) how is the organisation managing its continuous disclosure obligations

Supply chain disruption

·        what impact do third party suppliers have on an organisations ability to deliver its products and services

·        what contingencies has the organisation deployed to address any supply chain disruption



·        has the organisation acted appropriately in standing down or making employees redundant

·        how has the organisation addressed work from home arrangements, including related cyber security and privacy concerns

·        has the organisation adopted an appropriate safety standard where personal interactions are undertaken between employees and clients/customers


These are extraordinary times. The early signs are that companies and their directors will face D&O claims arising from the impact of COVID-19, from a variety of sources. There will often be strong defences given the speed that the pandemic has developed and its unprecedented effects. The D&O policy is there to help protect boards by ensuring they can robustly defend litigation and allow them to keep doing what is important – running their businesses.

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