This article is the first in a series discussing COVID-19 bankruptcies and insurance coverage.
As the expected wave of bankruptcies crashes upon the business world, directors and officers (D&O) insurance will play a critical role and serve as a key asset in any related disputes.
Per the Brookings Institute:
The current crisis could bring a much greater surge in business bankruptcy filings than either of the two most recent recessions. Prior to the current crisis, businesses took on an extraordinary amount of debt—$15.5 trillion, according to one estimate, a 52% increase since its high point during the 2008 crisis. This debt, coupled with the nearly complete shutdown of the economy and the fact that the revenues of many businesses will be slow to recover, even after economic activity resumes, suggests there will be a surge of business bankruptcies.
David Skeel, “Bankruptcy and the coronavirus,” Economic Studies at Brookings (April 2020); see also Hank Tucker, “Coronavirus Bankruptcy Tracker: These Major Companies Are Failing Amid the Shutdown,” Forbes (May 3, 2020).
The anticipated surge in bankruptcies will likely result in a wave of D&O claims filed by creditors or bankruptcy trustees. Kevin M. LaCroix, “Coronavirus and D&O Insurance: The Latest Interim Update,” D&O Diary (May 10, 2020); Pasich LLP, “Legal Alert: Insurance Coverage for Losses and Claims Associated with the Coronavirus,” (May 18, 2020). These claims will likely arise out of a combination of suits regarding allegations of misstatements in company reporting on the impact of COVID-19, allegations of mismanagement, or alleged breaches by a Board of the duty of care or breach of the duty of oversight. Id.