D&O Renewal Questions for Private Equity Backed Companies in the Wake of COVID-19

As our portfolio company clients renew their D&O policies, the impact of COVID-19 on the renewal process is starting to become clearer.

The private equity deal team typically gets involved with the D&O process when the transaction closes, and then the portfolio company management team facilitates the subsequent renewals. With the questions that underwriters are asking, we suspect that private equity professionals will have to support their management teams and get involved on some level when these policies renew.

The following is a sampling of the types of questions that you will expect underwriters to ask to understand the impact that COVID-19 has had on your business and liquidity:

  • Describe the impact that the pandemic had on your business.
  • What is the % of revenue impacted?
  • What is your monthly cash flow under current conditions?
  • What is your current liquidity as of today?
  • What cost containment strategies were implemented?
  • Did the lending facility waive covenant violations?
  • What communication took place with lending partners and what was the debt servicing strategy?
  • Describe communication with your Private Equity Sponsor.
  • Did the Private Equity Sponsor advise you on capital preservation?
  • Did they offer to provide capital if needed?
  • What % of your workforce was furloughed w/ benefits and how long did you support this?
    • Laid off temporarily but expected to rehire?
    • Terminated other than temporarily?
    • Working remotely or work shifting?
  • Were there any requested accommodations made by employees that you were not able to provide?
  • What was the strategy for determining which employees were impacted and which employees return?
  • Was outside employment counsel consulted during this time?
    • Did counsel offer guidance specific to the Families First Act?
    • Name of firm?
  • If you make investment decisions in house for any sponsored plan, please describe what steps were taken to preserve capital?
  • Did you reduce any benefits or amount of any benefit including reducing or eliminating match?

Risks that Concern Underwriters

It is common for the underwriting community to overreact in a time of crisis. However, we believe that the concerns underwriters have and the questions they are asking are entirely appropriate. From their perspective, they are concerned with the following risks that are heightened with COVID-19:

  • There are a lot of moving parts associated with COVID-19, so underwriters are concerned with the adequacy and accuracy of financial disclosures.
  • There is not a playbook for how to navigate this new dynamic. It could be very easy for a management team to make decisions that in hindsight did not meet their Fiduciary obligations.
  • D&O claims often come from many sources, including, but not limited to, investors, bank creditors, anyone that has a financial interest, regulators, employees (if they are stakeholders), customers, competitors, and vendors. With so many outside entities impacted by the decisions made at your company, you could face a reputation risk whether founded in truth or not.
  • Regulatory bodies are also unprepared for this type of pandemic. It is unclear how they will respond and what that will mean for companies.
  • Many companies were forced to shut down completely or scale back their operations. A companies ability to rebound from this unprecedented event will determine their long-term viability. If your company is under financial distress, the incumbent underwriter might narrow coverage and/or increase premium to protect their position.
  • Employment Practices Liability is often paired with D&O, and the prevalence of furloughs, lay-offs, and terminations create heightened exposures.

How to Navigate the Renewal Process

  • The market was already hardening DRAMATICALLY coming into 2020. Take the process seriously and give as much lead time as humanly possible for renewals or new program negotiations. At a minimum, complete the renewal applications and answer the supplemental questions at least 60 days prior to renewal.
  • Ask your broker for an early indication from the incumbent so you know where they stand.
  • If you have concerns about what the incumbent’s terms will be, ask your broker to arrange a call with your underwriter so you can answer questions directly.
  • Be prepared with answers to questions like the ones included in this blog when your renewal is approaching. You will likely answer them when you complete your applications, and then one more time as you get closer to binding coverage. Actual questions from underwriters will vary based on your company’s size and industry.
  • Stay informed by asking your broker to over-communicate throughout the renewal process.
  • Sorry to say it but prepare for the worst.

 Conclusion

The renewal process was already becoming challenging pre-COVID-19 due to market conditions. Things will only get more difficult given this very fluid and challenging situation.  Start early. Be prepared. Be informed. Demand results.

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