Event litigation and A&D insurance policies

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From event litigation and event cancellations claims on securities and regulatory enforcement actions, the COVID-19 pandemic has resulted in a number of liability exposures for directors and officers that go well beyond operating losses. The first wave of COVID-19 securities lawsuits, for example, focused on allegations that companies made false and misleading statements or failed to disclose in securities filings how they responded to pandemic (in the case of several cruise lines) or may have benefited from (in the case of pharmaceutical companies). Most, but not all, of these lawsuits were dismissed on preliminary motions. Either way, however, these companies and individuals would have benefited from strong A&D liability insurance coverage.

Last week, shareholders filed a federal securities class action lawsuit against a health insurance company and its directors and officers, which could mean the next wave of COVID-19 litigation involving D&O policies. In Martinez vs. Bright Health Groupthe plaintiffs alleged that the company and its executives were, among other things, “ill-equipped to handle the impact of COVID-19-related costs”, despite the submission of offering documents leading to the company’s IPO touting the company’s operational and financial track record. success.

Shortly after its June 2021 IPO, Bright Health released third-quarter financial statements that included a “sharp increase” in the company’s medical expense ration, in part due to “the adverse impact costs related to COVID-19”. At this news, the company’s stock price fell 32.33% and continued to trade below its IPO price. The lawsuit alleges that shareholders suffered damages as a result of the defendants’ wrongful acts and the resulting “precipitous decline” in the market value of the company’s securities.

This new lawsuit is another approach to “event-driven litigation,” that is, securities claims based on specific adverse events, rather than fraudulent financial disclosures or accounting issues, as a catalyst for sue companies and their officers and directors for the resulting decline in share price. The class action takes aim at the company’s failure to assess the increased costs associated with the pandemic, which could, in theory, apply to a wide range of businesses facing supply chain constraints or similar cost increases.

The Bright Health case represents another permutation of COVID-19 and its negative impact on the company’s financial health and the company’s actions or inaction to respond to these adverse events. Maintaining adequate A&D coverage and limits is critical to mitigating the risk of uninsured losses. Even when securities claims are dismissed in advance motions, defense costs can be significant. And even companies with strong D&O programs should not be complacent about renewals, as new or changed terms, conditions or exclusions (such as those prohibiting coverage for pandemic-related losses) may appear in policy forms. or updated endorsements.

Copyright © 2022, Hunter Andrews Kurth LLP. All rights reserved.National Law Review, Volume XII, Number 14

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