COVID-19: What Are the Management Liability Implications?
As the COVID-19 pandemic continues to develop, Australian and global businesses are feeling the impact on production and/or service capabilities. This is likely to lead to fluctuations in financial performance over the coming months. Below we consider the management liability risks that companies and directors and officers may face globally as a result.
Risks to Directors and Officers
With the persistent spread of COVID-19, directors and officers in many businesses have to react quickly to the restrictions on business operations and management of staff. Airlines, travel companies, the hospitality sector, and manufacturers have been particularly hard hit, with many other companies’ profit expected to be affected through supply-chain disruption, drops in consumer demand, or closures of offices and factories.
As a result, the robustness of a company’s contingency planning will be tested – utilising back-up sites to maintain operations during interruptions, locating staff across different sites to minimise the impact of an outbreak in a single office, or relying more heavily on technology to enable business to continue remotely.
Where there appear to be gaps or failings in contingency plans or management response, a company's employees, clients, and investors may question whether senior executives failed to plan and respond adequately. Allegations of management failings may include:
- Poor communication to staff globally, meaning an inconsistent and potentially disruptive approach to managing ongoing pandemic risks.
- A failure to have adequate systems in place to allow access to company servers and systems so that business as usual can be maintained while staff are required to self-isolate.
- A failure to keep investors informed of the financial impacts to the business including updated earnings guidance, leading to possible securities litigation.
- A failure to manage health and safety in your workplace under Australian Work Health & Safety laws.
- Disseminating false or misleading information.
- A failure to supervise employees.
- Breaching confidentiality and privacy.
- A lack of alternative technology to engage with clients while travel is restricted or conferences are cancelled.
- Criticism of "just-in-time" manufacturing, which has left businesses with no back-up supply, thereby slowing or halting production.
- Lack of planning on how to monitor systems and controls at the required level with increased remote working.
- Lack of cyber resilience capabilities to ensure the security of data when there is a very high level of remote access.
Any of these failings, and more, could expose directors and officers to investigations and claims arising out of their contingency planning and decision-making.
Directors and officers of publicly listed companies will also have to consider their reporting obligations, particularly in explaining how the company is resourced to deal effectively with the ongoing crisis, long-term strategy planning, and the pandemic's likely impact on financial performance.
Directors and Officers Liability Insurance
Directors and officers liability (D&O) insurance is intended to provide protection for directors and officers from investigations and claims that may arise from decisions taken by them in their capacity as a director or officer of the company. Typically, the policy will be triggered by allegations that a director or officer has committed a "wrongful act", although many D&O policies provide cover for investigations without the need for a “wrongful act”
In the case of COVID-19, if a director or officer faces a claim alleging their contingency planning was unsatisfactory or that inappropriate management decisions were made, any D&O policy in place might be triggered.
While D&O insurance policies will often exclude cover for claims for bodily injury and property damage, these exclusions are generally narrowly drafted so that claims arising from or relating to bodily injury or property damage will still attract cover under the policy. Also, the exclusion will often not apply to claims for emotional distress or mental anguish in any event. However, the specific terms and conditions of any such policy should be considered, to determine whether any claim against a director or officer relating to management decisions arising from the COVID-19 pandemic may be covered under the policy.
Employment Practices Liability Insurance
While companies put their contingency planning to the test, they will be considering whether they have adequate resources to sufficiently address risks to individual employees. In particular, businesses may find themselves exposed in the steps they take, or fail to take, to protect employees.
Employment practices liability (EPL) insurance provides cover for claims alleging employer violations of employment law This includes any type of discrimination, sexual harassment, wrongful termination or deprivation of a career opportunity brought by employees, former employees, or potential employees. Some policies also include cover for claims brought by third parties such as clients and vendors (third party liability coverage). In some instances, cover might be limited to discrimination and harassment claims. An EPL policy will likely cover investigation and defence costs, along with compensation that may ultimately be payable.
An EPL insurance policy will generally have a bodily injury and property damage exclusion, so it should be reviewed to determine whether it is widely drafted to include any claim that "arises from, is attributable to or relates to" such injury or damage. Broadly drafted exclusions could mean that cover under an EPL policy for claims relating to the COVID-19 pandemic is limited. However, the specific terms and conditions of any EPL policy should be considered carefully to determine whether cover is available.
In terms of employment practices, questions may arise as to whether employers have taken sufficiently timely and appropriate steps to manage risk, such as by cancelling meetings, events, and non-essential travel, particularly to international locations. Also, whether employers have met their obligations in keeping employees informed on risks, educating them on good infection control, and encouraging and enabling them to work from home. There are also risks of adopting differing approaches with employees located in different jurisdictions or working in different parts of the business in order to address the health risks.
Claims may therefore arise with allegations including:
- Distress caused by lack of proactive management of the crisis within the business.
- Bodily injury if the employee becomes infected with COVID-19.
- Discrimination if the company is managing risks differently in different locations, teams, and so on.
- Financial loss arising from enforced self-isolation
- Breach of privacy, emotional distress and mental anguish.
COVID-19 presents significant risks for normal business operations. Companies and their directors and officers should be mindful of the claims that may arise from the management of these risks, and note how their insurance policies may respond to provide protection.