In March, we reported on the initial filing of several securities class action suits arising from the coronavirus pandemic (COVID-19). For example, at the start of the pandemic, shareholders of Norwegian Cruise Lines Holdings, Ltd. filed a class action alleging that the company and certain officers violated the Securities and Exchange Act of 1934. The lawsuit alleged that the cruise line made false and misleading statements about COVID-19 in order to persuade consumers to purchase cruises. This allegedly caused the share prices to be cut in half.

As we predicted, the Norwegian lawsuit marked the start of these event-driven securities claims. Since then, close to 20 securities lawsuits have been filed, which arise directly or indirectly from COVID-19 and its impact. Fortunately, directors and officers (D&O) liability insurance policies should provide coverage for these suits.

D&O policies are primarily designed to protect directors and officers from personal liability for claims against them that arise out of their work for the insured company. D&O policies provide coverage both when the insured company indemnifies the individual director or officer–then advancing defense costs for the individual director or officer that the insured company would otherwise be paying and covering any judgment or settlement the insured company would otherwise be indemnifying–and when the insured company cannot indemnify or defend the director or officer because of company policy, financial condition, or applicable law.

Most D&O policies also provide “entity coverage,” which insures the insured company for claims made against it directly. For public companies, entity coverage is typically limited to coverage for “Securities Claims,” while private company D&O policies usually provide broader coverage for a range of claims arising out of the company’s purported wrongful acts. Indeed, D&O policies are not standardized off-the-shelf forms like some commercial property or general liability policies, and instead differ in scope of coverage, exclusions used, and endorsements added.

While public company D&O policies limit entity coverage to “Securities Claims,” the definition of “Securities Claims” used is often broadly defined as any and all claims involving an actual or alleged violation of state or federal securities laws. Many policies go a step further and affirmatively include shareholder derivative demands, claims for breach of fiduciary duty, government or regulatory investigations, and issuance of subpoenas as covered “Securities Claims.” Such definitions should be broad enough to apply to recent pandemic-related securities claims.

Indeed, while recent securities claims are directly or indirectly related to a novel and unique worldwide pandemic, the claims themselves are exactly what D&O liability insurance was designed to cover. For example, in June, shareholders of Co-Diagnostics, a molecular diagnostics company, filed a purported class action complaint against the company and individual directors and officers, alleging the company falsely stated that its COVID tests were 100% accurate. Co-Diagnostics was among the medical companies who worked to develop coronavirus tests kits. According to the complaint, as questions about the product’s accuracy came to light, stock prices dropped significantly. This led to a lawsuit centered on the company’s misstatements about the COVID-19 related product. The plaintiff alleges that Co-Diagnostics violated section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the Exchange Act (arguing that the individual directors and officers were “controlling persons” of Co-Diagnostics, as defined by the Act). In another case, shareholders of Zoom Video Communications, Inc. filed an action against the company and its CEO and CFO for purported misrepresentations made about the data privacy and security measures of the database. While COVID-19 did not create the software deficiencies, the complaint alleges that the pandemic brought the shortcomings to light. The complaint alleges that the defendants made false and misleading statements about the company’s business, operational and compliance policies, specifically that defendants misrepresented or failed to disclose that Zoom had inadequate data privacy and security measures and practices in place.

These claims are stereotypical “Securities Claims” covered under a D&O policy: both allege purported wrongful acts by the Company and by insured directors and officers acting in their capacity as such. D&O policies typically define “wrongful act” with respect to entity coverage as “any actual or alleged act, error, omission, neglect, statement, misstatement or breach of fiduciary duty or other duty committed, or allegedly committed or attempted, by the Company.” Here, both suits allege false statements or misrepresentations by the Company, thus “wrongful acts.” While the complaints do allege fraud and deceit, which, an insurer may argue, trigger a D&O policy’s “conduct exclusion” prohibiting coverage for intentionally dishonest or fraudulent conduct, such allegations will not foreclose the insurer’s obligation to advance defense costs for the suit. Most conduct exclusions, by their terms, require that the fraudulent conduct be determined by a final adjudication in the underlying claim–unless and until that final adjudication occurs, the exclusion cannot apply. Further, if the case settles prior to such an adjudication, the exclusion does not apply, and the insurer cannot escape its obligation to indemnify the insured(s) for settlement.

Although D&O insurers may attempt to rely on bodily injury and/or pollution exclusions to preclude coverage for pandemic or COVID-19 related securities suits, these exclusions, too, should not bar coverage. These exclusions simply should not apply in a situation like this where the claimed damages stem from financial losses (i.e., drop in stock prices), rather than damages for bodily injury and/or pollution. Courts narrowly construe exclusionary language and place the burden of proving that all elements of the loss are excluded on the insurer. Insurers cannot meet this burden here where the claims seek to recover for breaches of duty and not for bodily injury or property damage. The “wrongful acts” alleged in securities claims are allegedly false, misleading, or fraudulent statements concerning the management, operation, or financial health of the company; not actions by the company, directors, or officers that cause bodily injury or pollution.

As we mentioned above, shareholders of Norwegian Cruise Lines  brought a putative class action against the company and certain officers alleging that the Company and directors made materially false and/or misleading statements, and/or failed to disclose material adverse facts about the Company’s business, operations, and prospects. Specifically, the complaint alleges that: (1) the Company was employing sales tactics of providing customers with unproved and/or blatantly false statements about COVID-19 to entice them to purchase cruises, thus endangering the lives of both their customers and crew members; and (2) as a result, Defendant’s statements regarding the Company’s business and operations were materially false and misleading and/or lacked a reasonable basis at all times.

The allegations against Norweigan, while discussing COVID-19 response, focus on and arise out of alleged losses from Norweigan’s purported statements to the public, rather than bodily injury to any plaintiff. Thus, any bodily injury exclusion should not apply, and the “loss” sought to be insured–defense costs and any settlement or judgment–does not arise from a claim for bodily injury. Moreover, many bodily injury exclusions in public company D&O policies contain express exceptions for securities claims like this one.

Similarly, no “pollution” exclusion should apply. First, where “pollutant” or “pollution” is not defined in the policy, policyholders should refute any suggestion that the parties reasonably expected the term “pollutant” to include a human disease or virus or that the plain meaning of the term “pollutant” can be construed to include COVID-19. Second, the wrongful acts on which the Claim is based will be misrepresentation, mismanagement, or other purported wrongs that are divorced from the virus itself. As a result, the exclusion should not apply. Third, these exclusions often require the “discharge, dispersal, or release” of “pollutants,” none of which apply to the natural transmission of the disease between people.

When considering coverage for pandemic-related securities claims, both courts and policyholders should focus on the gravamen of the allegations in the complaint and the alleged legal basis for liability (typically managerial actions or omissions, or breaches of duty, which impact shareholder value), and should not be distracted by insurers’ reservations to deny coverage based on the conduct, bodily injury, or pollution exclusion. In addition, corporate policyholders should consult with experienced coverage counsel to carefully review any new endorsements to their policy at renewal as some insurers are now insisting on broad COVID-19 and/or pandemic exclusions for future policies. Ultimately, the applicability of any exclusion will depend on the language used, but having broad D&O coverage will be important in defending against securities class action suits arising from purported wrongs committed during the pandemic.

This post features contributions from Casey L. Coffey.