The pressures on businesses in the current climate mean that D&O insurance is more important now than ever. However, we are seeing a reduction in the availability in the global insurance market of D&O cover for directors of UK incorporated companies. Indeed, many businesses are finding that insurers are either declining to renew their D&O cover or are only willing to renew subject to stringent conditions, such that directors and officers will not be protected from the risks associated with the COVID-19 pandemic.
D&O insurers face a number of difficulties as a result of this crisis, including requests for coverage extension, payment delays and increasing notices of potential claims. In addition to these process-related issues, carriers have been forced to find ways to contain their risk exposure and adjust their underwriting activities accordingly. Some insurers have started to use specific COVID-19 questionnaires that cover everything from a company’s finances to whether it has furloughed employees – this is not just for D&O cover either, but more broadly too.
Some insurers have stepped back from writing new business and, to the extent new business is being written, the terms are often more restrictive and the limits lower. Where D&O cover is withdrawn or severely reduced, and in the absence of adequate protection, directors of distressed businesses will find it increasingly difficult to decide whether (and when) to file for the protection of administration, which brings with it significantly greater personal risk.
Where the market is unwilling or unable to provide D&O cover, the question arises as to whether the UK government will step in to provide a back-up insurance scheme to provide support to directors to cover the risks resulting from COVID-19 related issues. In the absence of any government-backed scheme, directors who lack the benefit of D&O cover will inevitably become more risk averse – which may have the knock-on effect of stifling the activity of otherwise healthy businesses.
In the M&A market, we are seeing both buyers and sellers re-evaluate their strategies in these testing times. The attention of strategic buyers is currently focused on existing businesses, financing, supply chain issues and their own workforces – new M&A activity is unlikely to be a priority.
However, one of the exceptions to this is in the distressed M&A space. As with previous downturns, there is increasing interest in this area as acquisitive businesses look for potential opportunities.
The recovery phase of the current crisis very much depends on directors and officers being able to take reasonable decisions on the future of their businesses, secure in the knowledge they have adequate financial protection behind them. Any inability to procure adequate and responsive D&O cover will weigh heavily on the minds of boards of directors as they consider how best to respond.