COVID-19: Insurance Implications for Financial Institutions

Amid the tragic human and economic impact of COVID-19, the pandemic could potentially affect financial institutions' operations and insurance provisions in many ways.

COVID-19 continues to spread globally, presenting unprecedented risks to people, businesses, and economies. Financial institutions need to address different challenges, from maintaining employee safety, facilitating business continuity, and ensuring the principles of treating customers fairly remain embedded in the business, to maintaining the financial infrastructure.

The pandemic's initial potential impact on financial institutions and their insurance is considered below. The economic effects are, of course, likely to be magnified in light of the current lockdown imposed by the UK government.

Directors and Officers Liability Insurance

Given stock market volatility, a stock drop after any announcement relating to COVID-19's impact on the UK or globally is very possible. Such stock drops could attract securities class actions alleging disclosure deficiencies, breaches of fiduciary duty, and corporate mismanagement, which may trigger coverage under directors and officers liability (D&O) insurance.

Areas that may attract particular attention in the financial institutions sector in this regard include:

• Increased loan/mortgage defaults and arrears.
• Potential deterioration in the housing market and the consequent effect on collateral value.
• Follow-on impact on tier-one ratio and loan coverage ratio.
• Interest rate sensitivity.

Derivative actions and/or regulatory investigation also remain possible. Although the Financial Conduct Authority (FCA) is monitoring the situation, it has yet to relax any regulations or reporting requirements. The US Securities Exchange Commission has offered some extensions of filings required under the Exchange Act, and specifically encouraged public companies (and their auditors) to disclose the anticipated impact of COVID-19 on the company to investors.

Current D&O policies do not contain specific exclusions for COVID-19, but both public company and private company D&O policies commonly have some form of bodily injury exclusion that may be relevant to insurers' position.  

In its recent statement, the FCA emphasised that it expects all firms to have tested contingency plans to deal with major events and business continuity. Failure to have such operational resilience is another area where future D&O claims may focus.

As ever, firms' conduct will be a key focus and it is clear from communications that the FCA is holding firms to a high standard. In particular, with employees working from home, firms should consider the broader control environment. While the FCA has softened its stance from earlier communications, and recognises it may not be possible to record all calls or submit data in as timely a fashion, firms should ensure standards are maintained in order to avoid future claims.

Professional Indemnity/Civil Liability

Professional indemnity (PI) or civil liability insurance policies are intended to cover claims resulting from allegations relating to a company’s professional services – whether it is a company installing fibre-optic lines for increased work-at-home capabilities or a fund manager handling clients' financial portfolios.

The liabilities resulting from COVID-19 that may be covered under a PI policy depends largely on the type of professional service the company provides. For claims relating to a company's services, or failure to provide services, PI policies are likely to be the most applicable insurance policy.

In a recent statement, the FCA made clear it expects firms to be flexible in supporting consumers, bearing in mind individual circumstances, and welcomes firms taking initiatives that go beyond usual business practices to provide that support. One example where the FCA has focused is firms showing more flexibility to customers in persistent credit-card debt. Firms need to be aware of this FCA guidance and act accordingly, in order to avoid potential third-party claims or regulatory sanctions alleging breach of these higher expectations.

Employment Practices Liability Insurance (EPLI)

Claims by employees alleging discrimination or harassment against protected classes could possibly increase, as a result of HR policies implemented in response to the COVID-19 outbreak. This further emphasises the importance of proactively managing business continuity, including all HR policies.

EPLI policies also often contain bodily injury exclusions that may be relevant to any COVID-19-related claims.

Cyber and Crime

COVID-19 has resulted in one of the largest ever work-from-home situations. As a result, companies' cybersecurity will likely be stressed to an unprecedented level around the world.

To the extent that cyber criminals can exploit weaknesses from the surge in remote connections, claims under cyber policies may arise.

With most employees working remotely, there could be more "social engineering" fraud as people may be less likely to follow standard protocol given their remote access.

Firms need to ensure controls are maintained as tightly as possible in the current conditions, and that there is a culture of verifying requests in circumstances where usual controls are challenged.

The UK's response to COVID-19 is continuously evolving and the economic impact can be clearly seen as the government moves to lockdown society and contain the pandemic. With the potential impact on financial institutions directly aligned to the economy, financial institutions need to stay apprised of the evolving risks and work alongside their broker to understand how their insurance may address them.