In response to the COVID-19 pandemic, Australian regulators have been assessing the preparedness of the financial system to respond to the economic volatility caused by the pandemic. ASIC chairman James Shipton recently confirmed that in ASIC's planning for the pandemic, the regulator was contacting banks, super funds and other financial players to determine what business continuity arrangements were in place. It has also been monitoring the continuous disclosure of ASX-listed companies as a result of changing market sensitivities.
Considerations for Directors
For directors of local and international companies, it has become ever more important to ensure that they promptly and proactively assess and respond to new risks that have arisen and are expected to arise from the outbreak of COVID-19. These risks may impact both companies and their boards, and span financial and non-financial issues. Those issues include:
Significant interruption to business caused by a widespread pandemic, or government controls put in place to control spread of the disease;
- Continuous disclosure obligations under the ASX listing rules, where companies that fail to comply with their disclosure obligations may be at risk of shareholder action;
- Impacts on capital raising and corporate transactions from COVID-19 and disclosures of risk;
- Impacts on financing arrangements;
- Lower revenue and numbers of customers, including event cancellation, for industries such as tourism, retail and entertainment;
- Impacts caused by disruption or suspension of a critical supply chain for a period of time;
- Changes to business operations and large workforces to comply with social distancing measures;
- Impacts on contractual arrangements, including risks arising from force majeure clauses, 'material adverse change' conditions in sale agreements, and financial covenants; and
- Compliance with specific laws and regulatory obligations, including orders made under health security, employment, and workplace safety laws.
Under the Corporations Act 2001 (Cth), directors are required to carry out their duties with care and diligence, and in good faith bearing in mind the interest of the company and stakeholders. They also have a fiduciary duty. Generally speaking, they ought to ask:
Taking account of all the circumstances, is what I propose to do 'in my honest belief' in the best interests of all the shareholders (present and future) of the particular company of which I am a director?'
Insurance considerations
Directors & Officers' (D&O) liability insurance policies generally provide cover for claims brought against the directors or officers of a company in respect of wrongful acts committed – or allegedly committed – in their capacity as a director or officer of that company. This is particularly designed for instances where directors have acted in their honest belief but, by whatever cause, have allegedly fallen short of their obligations.
The types of loss covered by D&O policies generally extend to compensation, defence costs and civil fines or penalties that may arise from such a claim. Policies may also cover investigation costs incurred to report to a regulator or government body.
However, many D&O policies may contain exclusions and terms which may adversely impact upon directors' coverage under the D&O Policy. Particularly in the context of COVID-19, some of the more pertinent exclusions include:
- 'Bodily Injury' exclusions could potentially exclude cover for claims arising from COVID-19 (particularly if the exclusion adopts broad introductory language such as "based upon, arising from, or directly or indirectly connected with").
- 'Dishonesty/Misconduct' exclusions may obviate cover for claims arising from misconduct, such as wilful breach of statute, dishonest conduct or fraud. In many cases, a wilful blindness to COVID-19 related legislation could trigger the exclusion.
- 'Insolvency and Insolvent Trading' exclusions will remove cover for claims based upon or arising from insolvency of the company, including allegations against directors for trading whilst insolvent.
Mitigation and compliance
In the face of COVID-19, the most appropriate mitigation measures for companies and boards will differ depending on industry, size of the business, listing status and operations. It should also be borne in mind that directors' existing duties and responsibilities to their members and shareholders remain the same as usual, as encapsulated in the Corporations Act 2001 (Cth) and their contracts.
In line with those usual duties and indeed in addition to them, entities are taking steps to ensure their ordinary compliance measures are tough enough to withstanding the present and changing situation behind COVID-19. Those may include:
- Adopting protocols to ensure staff and operations are compliant with the new matrix of legislative provisions, and protecting human resources;
- Voluntary and immediate reporting of suspected outbreaks of COVID-19 among business assets, buildings, and holdings where required;
- Notifying claims already made (if applicable) and potential circumstances, in consultation with brokers and legal;
- Considering existing policy terms and ensuring board education in relation to current terms, conditions and potential exclusions. To the extent those policies appear to fall short of the cover the board demands, those should be reviewed with your broker – top-up cover and modular insurance policies might be considered;
- Close monitoring of solvency provisions and obligations to creditors, particularly in the financial services sector, in circumstances where companies are experiencing cashflow issues as a result of COVID-19;
- Upscaling compliance with changing federal and state government requirements – which continue to change from day to day;
- Adopting or updating a business continuity plan to identify critical business functions, critical key staff, and essential functions of the company during the current state of emergency; and
- Maintaining an active risk and regulatory team reporting to the Chief Risk Officer or General Counsel, to ensure clear reporting parameters to keep direct engagement with board and stakeholders as the climate evolves.
While the above measures are not novel, they risk being overlooked in lieu of more immediate steps by boards taking crisis steps to respond to the current human biosecurity emergency status announced by the Federal Government.
However, the potential fallout expected from COVID-19 risks having a longer-term effect than the immediate emergency. The potential for a spike in financial claims against companies and directors requires boards to take prudent steps now to best position themselves against such future claims. They should also be mindful of the limits of their existing policies, given the breadth of some market exclusions on the standard D&O policy wording.
Next steps
Directors should review business continuity plans established for crisis management to assess their suitability as a COVID-19 response.
- Companies and boards generally should be mindful of their future position, and ensure that steps taken now do not fall short of their standing duties under the Corporations Act 2001 (Cth).
- Directors of listed companies should be mindful of continuous disclosure ramifications of COVID-19, as class actions may follow for companies that fail to make timely and accurate disclosures in accordance with their obligations.
- Directors should review any contractual obligations to customers or clients or financial arrangements to identify any issues or opportunities for mitigation.
- Companies should carefully review their insurance programmes or insurance policies to assess whether there is adequate cover for the legal and financial risks that may arise from COVID-19.
If you are looking for advice or support with insurance issues arising from COVID-19 or public health emergencies, MinterEllison can assist you with understanding and responding to these risks. We provide solutions to Corporates, Insurers, Intermediaries, Underwriters, Brokers and Agents, across the full risk spectrum within the insurance sector.