In a prior post, we predicted that novel coronavirus (COVID-19) risks could implicate D&O and similar management liability coverage arising from so-called “event-driven” litigation, a new kind of securities class action that relies on specific adverse events, rather than fraudulent financial disclosures or accounting issues, as the catalyst for targeting both companies and their directors and officers for the resulting drop in stock price. It appears that ship has sailed, so to speak, as Kevin LaCroix at D&O Diary reported over the weekend that a plaintiff shareholder had filed a securities class action lawsuit against Norwegian Cruise Line Holdings, Ltd. alleging that the company employed misleading sales tactics related to the outbreak.
The lawsuit alleges that the cruise line made false and misleading statements or failed to disclose in its securities filings sales tactics by the company that purported to provide customers with unproven or blatantly false statements about COVID-19 to entice customers to purchase cruises. Those allegations rely on two news articles reporting on the company sales practices in the wake of COVID-19: a March 11, 2020 Miami New Times article quoting leaked emails in which a cruise employee reportedly asked sales staff to lie to customers about COVID-19 to protect the company’s bookings; and a March 12, 2020 Washington Post article entitled, “Norwegian Cruise Line Managers Urged Salespeople to Spread Falsehoods about Coronavirus.” The lawsuit alleges that the company’s share price was cut nearly in half following these disclosures.
Most public companies targeted in securities litigation have some form of D&O or other management liability coverage. As with any event-driven securities claims, or really any insurance exposure, the ultimate coverage determination for lawsuits will turn on the specific policy language at issue. The good news for policyholders, however, is that D&O coverage is typically broad for securities-type claims like those alleged in the Norwegian lawsuit. The lawsuit is only a few days old, and it is unclear whether any of the claims will succeed. Regardless of whether any securities violations are proven, however, D&O policies can protect companies and individual insureds prior to any judgment or settlement by paying defense costs which can be substantial.
The allegations at issue in the recent lawsuit, while specific to the securities filings and alleged business practices of a particular company, are targeted at public communications, marketing efforts, sales practices, and corporate management that could be scrutinized in a variety of different industries impacted by COVID-19. In addition, it is possible that plaintiffs file suits based on other theories under federal securities laws, such as claims that a company misled investors about its exposure to the risk of a pandemic, its oversight and risk management practices, or the adequacy of its business continuity plans. As a result, this is the first but likely not the last event-driven lawsuit relating to the current situation. Having sufficient D&O coverage in place, and notifying the insurers and pursuing coverage for defense costs (or liability, if any), can be critical to mitigating risk of increased event-driven COVID-19 exposures. In addition, counsel for public companies should keep in mind the possibility of COVID-19-related securities law claims in reviewing past disclosures and in preparing future disclosures.