The impact of the economic crisis caused by the COVID-19 and D&O insurance: some issues to be considered by insurers.

The COVID-19 pandemic has caused and continues to cause a high number of deaths and infections every day and has triggered the most important global health, economic and social crisis in more than a century.

In Spain, it is hoped that the worse has passed and that the reopening process may continue, although the uncertainty about the development of COVID-19 makes us fear new outbreaks that could make it necessary to adopt new measures of social distancing, restrictions on the mobility of individuals and paralysis of economic activities.

According to data published by the National Statistics Institute on June 30, 2020, Spanish GDP fell by 5,2% in the first quarter of 2020. In view of these data and the forecasts of the Bank of Spain[1] with a sharp drop in GDP of between 16% and 21,8% in the second quarter of 2020, it seems clear that the Spanish economy has entered into recession. The macroeconomic projections for the period 2020-2022 published by the Bank of Spain forecast that in an early recovery scenario, the Spanish GDP would fall 9% in 2020 and would rebound 7,7% and 2,4%, respectively, in 2021 and 2022, while under a gradual recovery scenario economic recovery would be slower, so that GDP would fall by 11,6% in 2020 and would grow by 9,1% and 2,1% in each of the two following years. Likewise, the Bank of Spain contemplates a third scenario of very slow recovery, in which GDP would fall to 15,1% in 2020 and would rebound 6,9% and 4,0% in 2021 and 2022, respectively.

The IMF has worsened its forecasts for the Spanish economy in 2020 with respect to those announced last April, when it anticipated a collapse of 8% of the Spanish GDP in 2020. According to the latest forecasts released on June 24, the IMF estimates a contraction of 12,8% of the Spanish economy.

D&O insurance market before and after COVID-19

Before the COVID-19 pandemic broke out, the market was already in a period of tightening D&O policy underwriting and renewal criteria – characterized by a reduction in capacity, coverage restrictions and price increases – a consequence of recent years of decreasing prices due to strong competition and the high number of claims both in Spain and elsewhere, with emphasis on regulated sectors such as finance, construction and energy.

The severe economic crisis generated by the COVID-19 pandemic will lead many companies, unable to meet their obligations regularly, to file for insolvency proceedings. According to the estimates of the Minister of Justice, an increase in insolvency proceedings of 246% is expected in 2020 and 619% in 2021[2]. This means jumping from the 7,000 insolvency proceedings filed in 2019 to 50,000 in 2021. Consequently, the potential liability of directors and officers in the context of insolvency proceedings that are characterised as guilty by the courts may trigger an increase in claims under D&O policies.

Faced with this adverse scenario, perhaps insurers should consider the possibility of restricting the scope of coverage of defence expenses and those related to civil and criminal bonds, among other issues (e.g., the use of coronavirus-related questionnaires, the addition of coronavirus or infection diseases related exclusions, the reduction of the limits offered, pricing increase, etc.).

Coverage of defence expenses

It is customary for D&O policies to provide for the advance of defence expenses, provided that the parties have agreed to the free choice of lawyer by the insured for the defence of any insured claim or event. Defence expenses are generally included in the liability limit and therefore erode the policy limit. Generally, D&O policies provide that the advance of defence expenses will depend on a prior agreement regarding the allocation of coverage between covered and non-covered claims. If such an agreement cannot be reached, the insurer will normally anticipate the defence expenses it considers covered. In any case, defence expenses are subject to the prior written approval of the insurer. If the insured admits responsibility or is convicted, the defence costs must be returned to the insurer. However, there are policies on the market that waive to claim reimbursement of defence expenses from the insured. D&O policies issued in Spain include a definition of defence costs or expenses. They are normally defined as reasonable and necessary fees, costs, charges and expenses (with the exception of certain remunerations) incurred with the prior written consent of the insurer, which will not be unreasonably withheld or delayed, for the investigation, defence, adjustment, settlement or challenge of any claim made or presented against any insured.

Coverage of civil and criminal bonds

In criminal proceedings, the courts usually require the directors and officers to post security (bond) in order to guarantee their potential civil liability arising from a criminal offense. That is, a crime may be the source of civil liability. It is called civil bond (“fianza civil”). Most D&O policies guarantee the provision of a bond by the insurer, which must be posted within the normally short term established by the court, by depositing cash or a bank joint and several guarantee or filing a D&O policy that covers the risk of providing security and guarantee the immediate availability of the amount in question. In the event of conviction or admittance of liability by the insured, the insurer will have the right to be reimbursed by the insured for the bond amount. A very small part of D&O policies covers the expenses of constitution of the civil bond. As for criminal bonds (bails), that is, those established by the court to avoid the provisional imprisonment of the investigated person, most of the policies cover the expenses of constitution while few of them directly provide for the criminal bond.

It is well-known in the D&O insurance market that coverage of defense expenses, without deductible or sub-limits, has contributed to increasing claims in this line of  business in recent years, mainly due to the multiple criminal proceedings initiated against directors and officers as a consequence of the financial crisis of 2008. Among other reasons, claimants resort to criminal proceedings because undoubtedly they exert more pressure on those under investigation than civil proceedings, allow for wider investigations and lesser costs and offer some agility since the criminal court may adjudicate both the criminal liability and the civil liability derived from the crime, unless the injured party opts for claiming damages in the civil court.

It is also known in the market that the imposition of substantial civil bonds by criminal courts has seriously affected the profitability of D&O insurance in recent years.

As noted, given the foreseeable increase in claims under D&O policies based on the potential liability of administrators in insolvency proceedings which are characterized as guilty, insurers will have to accommodate the new scenario by offering more restricted coverages, particularly in respect of small and medium-sized companies.

For example, the policy may provide (i) that the insurer will anticipate defense expenses for claims for which the policy provides coverage, not for potentially covered claims; (ii) that when there is a dispute over whether a claim is actually covered by the policy, the insurer will anticipate defense expenses only for the portion which the parties agree is not in dispute; and, (iii) that if such an agreement could not be reached, the insurer will anticipate defence expenses for the claims it considers covered, without prejudice to the insured’s right to dispute that decision in court. The possibility of introducing deductibles and compensation sub-limits for defence expenses that should appear in the policy duly broken down in a catalogue, should also be considered, as well as the reimbursement to the insurer if the insured is convicted for an intentional crime.

Regarding civil and criminal bonds, in view of the results of the last years and the prospects for the next ones, in general, insurers could limit coverage to the expenses of constitution and maintaining bonds, both civil and criminal, and exceptionally, to cover the constitution of civil bonds, with a sub-limit.

To conclude, insurers must consider, on the one hand, the position and the coverage expectations of the insureds, and on the other, the need to reduce their own exposure to the increase in claims due to of the severe economic crisis derived from COVID-19.


[1] Published on the Bank of Spain website on June 8, available at

[2] Royal Decree-Law 16/2020, of April 28, on procedural and organisational measures to deal with COVID-19 in the field of the Administration of Justice, provides for a series of insolvency  measures such as the extension of the suspension of the debtor’s duty to file an insolvency application until 31 December 2020 in order to allow the debtor to gain time to restructure its debt and/or obtain liquidity and compensate losses, either through the recovery of its ordinary activity or through access to credit facilities or to public aids, and to avoid the collapse of the Commercial and First Instance Courts.