Managing SPAC Risk During a Pandemic

SPAC risk

Managing SPAC Risk During a Pandemic

Mar 27, 2020 INTEL by Kristi Marvin

Andrew Pendergast, from Marsh, is back again to help further explain a SPAC team’s insurance needs in the time of Covid-19.  Additionally, Andrew will walk us through what teams and investors should be considering when evaluating SPACs and their risk going forward. This is an unusual time for everybody, SPACs included, so read on for how this affects the entire SPAC sector.


By Andrew Pendergast
Marsh SPAC Practice Leader

Over the last several weeks, the coronavirus pandemic has taken its toll on the global economy and left our clients with more questions than answers as to how insurance may or may not respond and what they should be doing to make sure their businesses are prepared.

Now more than ever SPACs should be evaluating the policies, procedures and insurance portfolios of their targets, or those they have acquired, with an emphasis on how they will be able to respond to and withstand potential liabilities arising from a pandemic.

The goal of this article is to educate the SPAC community on what those best practices look like and how insurance comes into play to protect the balance sheet of your investments.

Directors and Officers Liability Insurance

Public, private, and nonprofit companies — and their directors and officers — face potential exposure arising out of the COVID-19 pandemic that could trigger claims under directors and officers liability (D&O) policies. These exposures could manifest via traditional securities class-action litigation, derivative litigation, and regulatory investigations. Risk professionals should review their policy language and consult with their insurance advisors about potential coverage considerations.

Specific to SPACs, disclosures may now need to be made in the proxy filing to shareholders related to how a target company is prepared to deal with the coronavirus pandemic. This could lead to liability if investors claim they were false, misleading or incomplete. This would come in the form of a traditional securities class action claim against the SPAC and its directors and officers and should be covered by the SPAC’s D&O policy.

The SEC recently reminded public companies of the need to keep investors informed of their COVID-19 responses and potentially material financial and operational risks from the outbreak “to the fullest extent practicable.” Making these additional disclosures leaves the door open to investors to bring suits alleging misrepresentations in those filings.

As of this writing, at least two securities class-action filings have been made alleging misstatements related to the pandemic and its effect on businesses. If there is a corresponding stock drop, COVID-19 securities class-action claims may follow and allege deficient disclosures, misstatements, or failure to act.

It should be noted that D&O policies are not intended to cover direct bodily injury or property damage claims and there is a specific exclusion within the contract to address that. For example, if a lawsuit alleges that an individual was infected by COVID-19 during your roadshow, the D&O policy would not be intended to cover that. A general liability policy may apply in this case. You should discuss your specific policy language with your risk advisor.

The first thing that SPACs should closely examine at their target companies or those companies they have acquired is the business continuation planning at these companies.

Business Preparedness

To effectively respond to the threats of a pandemic, businesses should take a two-pronged approach, starting with preparedness strategies that cover emergency response, business continuity, crisis management, and crisis communications. Aside from the ability to monitor the progress of emerging pandemics and epidemics and understanding their potential impact, plans should also be in place to continue operations in case of travel restrictions and if organizations are directly affected.

Secondly, businesses should understand how existing insurance coverages may respond to a pandemic, and make any necessary changes to their policies, keeping in mind the potentially global nature of various diseases.

To remain resilient, organizations should seek to answer several critical questions. For example:

  • Which products and/or services are of greatest value and how would revenue be affected by a disease outbreak?
  • Will our plans work in the event of border closures, travel restrictions, or reduced exports of certain commodities?
  • What if we lose critical people, or have staff working from remote locations?
  • Will the fear of infection affect our key customer base?
  • How should we engage with public health and government entities?
  • Who should we involve in our response efforts?
  • How can we position the organization to respond positively?

There are several insurance considerations that stem from the COVID-19 pandemic and other potential future outbreaks, epidemics and pandemics. A brief overview of potentially impacted insurance lines is included here. Download a more in-depth report on COVID-19 and these coverage lines on Marsh.com.

Property and Business Interruption

The COVID-19 pandemic has prompted many cities and states to shut down or restrict public activities, including ordering or suggesting the closure of schools, malls, entertainment venues, restaurants, and other businesses. While demand has increased for some businesses that remain open, others have felt the effects of a pronounced reduction in economic activity across the country.

Traditional property policies generally are triggered by insured physical loss or damage. Many include coverage for business interruption loss, other time element coverages, and extensions such as interruption by civil authority, ingress/egress, attraction or leader property, and contingent business interruption/extra expense.

Workers’ Compensation and Employers Liability Insurance

The facts of individual workers’ compensation cases will vary, as will state and federal laws and an individual policy’s terms and conditions, which could provide for coverage beyond what is mandated by law. Depending on the language in each state’s statute regarding individual incidents or exposures to occupational diseases, workers’ compensation insurance could provide coverage for medical expenses and reimbursement of lost wages for infectious disease-related disability, as long as the exposure meets the jurisdictional compensability standard.

General Liability and Umbrella/Excess Insurance

Insurers generally take the position that a general liability policy extends only to actual injuries. They are likely to look closely at the nature of injuries alleged by third parties, and, while “bodily injury” may trigger coverage, insurers may reject claims based on fear of exposure, exposure without actual symptoms, or other mental or emotional injuries unless resulting from actual bodily injury.

Employment Practices Liability

Employers should be prepared for an uptick in employment practices liability (EPL) and wage and hour claims as the pandemic continues. Discrimination claims premised on specific groups of employees being targeted because of their race or national origin are of particular concern, as are disability discrimination claims by employees who exhibit symptoms of COVID-19.

Employers should also be aware of changes in employment law that have been made in response to COVID-19 and additional changes that may be forthcoming. The Families First Coronavirus Response Act was signed into law on March 18, establishing federal emergency sick leave as well as emergency paid family sick leave for companies with fewer than 500 employees. The bill creates a refundable tax credit for companies providing sick leave and family sick leave. Myriad laws are also being introduced — seemingly daily — at the state and local level to aid individuals affected by the pandemic.

Combining a comprehensive preparedness strategy with a robust insurance portfolio is the most effective way to ensure your business can withstand the unknown liabilities that can arise out of a pandemic such as this. A unique risk management strategy and insurance portfolio should be tailored to your specific business as no two companies face exactly the same risks. Make sure to consult with your insurance and risk management professionals to assist you as you evaluate the preparedness of your SPAC and potential targets.


For more on SPAC risk and Marsh’s SPAC risk specialists, visit Marsh’s SPAC specialist page or contact Andrew Pendergast. Marsh is the world’s leading insurance broker and risk adviser. With over 35,000 colleagues operating in more than 130 countries, Marsh serves commercial and individual clients with data driven risk solutions and advisory services. Marsh is a business of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people.

 

 

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