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New Year, New COVID-19 Securities Claims Present Continued D&O Exposures

From event-driven litigation and event cancellations to securities claims and regulatory enforcement actions, the COVID-19 pandemic has led to a number of directors and officers liability exposures extending far beyond business interruption losses. The first wave of COVID-19 securities suits, for example, focused on allegations that companies made false and misleading statements or failed to disclose in securities filings how they responded to the pandemic (in the case of several cruise lines) or stood to benefit from it (in the case of pharmaceutical companies). Most, but not all, of those suits were dismissed on early motions. In all cases, however, those companies and individuals would have benefited from robust D&O liability insurance coverage.

Last week, shareholders filed a federal securities class action against a health insurance company and its directors and officers that may signify the next wave of COVID-19 litigation implicating D&O policies. In Martinez v. Bright Health Group, the plaintiffs alleged that the company and its leaders were, among other things, “ill-equipped to handle the impact of COVID-19-related costs,” despite submitting offering documents leading up to the company’s IPO touting the company’s historical operating and financial successes.

Shortly after going public in June 2021, Bright Health reported third-quarter financials that included a “sharp rise” in the company’s medical cost ration, driven in part by the “unfavorable impact from COVID-19 related costs.” On this news, the company’s stock price fell 32.33% and continued to trade below its IPO price. The suit alleges that shareholders suffered damages as a result of the defendants’ wrongful acts and resulting “precipitous decline” in market value of the company’s securities.

This newest lawsuit is another take at “event-driven litigation”—that is, securities claims relying on specific adverse events, rather than fraudulent financial disclosures or accounting issues, as the catalyst for suing companies and their officers and directors for the resulting drop in stock price. The class action suit targets the company’s inability to assess increased costs associated with the pandemic, which could, in theory, apply to a broad array of companies facing supply chain constraints or similar cost increases.

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

Copyright © 2023, Hunton Andrews Kurth LLP. All Rights Reserved.National Law Review, Volume XII, Number 14

About this Author

Michael S. Levine Insurance Lawyer Hunton Andrews Kurth

Mike has more than 20 years of experience litigating insurance disputes and advising clients on insurance coverage matters.

Mike Levine is a partner in the firm’s Washington, DC office and a member of the firm’s Insurance Recovery team. Mike’s policyholder representation focuses on:

  • Property damage and business interruption claims, including COVID-19 losses
  • Event cancellation insurance counseling
  • Representations and warranties coverage
  • ...
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Geoffrey B. Fehling Associate Washington, DC Insurance Coverage Litigation

Geoff dedicates his practice to advising corporate policyholders and their directors and officers in complex insurance coverage matters, from placement of sophisticated insurance programs and policy reviews to claim advocacy through arbitration, litigation, trials, and appeals. As part of Hunton Andrews Kurth’s full-service insurance coverage practice, he works with clients to maximize insurance recoveries through policy analysis and audits, claims presentation and negotiation, alternative dispute resolution, and litigation.

Geoff regularly...