Many directors and officers liability policies are written on a “claims made and reported” basis. This means that the policy covers only claims that are asserted against the insured and reported to the insurer while the policy is in effect. The requirement that claims be reported during the policy period can lead to coverage difficulties, particularly when claims or potential claims are asserted near the end of a policy period, or when the relevant events leading to the claim straddle two policy periods. For instance, insureds can be placed in a difficult situation when a party is engaging in communications that complain about an alleged error or omission, but that perhaps do not rise to the level of what a non-lawyer would consider to be “claim.” If these communications are not reported to the insurer before the policy period expires, but a subsequent claim is later reported to the successor carrier, that successor carrier may deny coverage based upon a contention that the claim was “made” during the prior policy period or that the insured’s knowledge of the circumstances giving rise to the claim triggers a policy exclusion. The prior insurer, in turn, is likely to assert that there is no coverage because the claim was not reported while its policy was in effect.
Fortunately, many directors and officers liability policies contain provisions allowing the reporting of potential claims or circumstances that may lead to claims, even if no actual claim has been asserted. If done properly and in compliance with the applicable policy language, making a report of potential claims or circumstances that may give rise to claims will allow the insured to seek coverage for a claim that actually results from those circumstances under the insured’s policy even after the policy expires. In effect, the policy period is extended as to any claims that result from the circumstances reported to the insurer.
In light of the stakes at issue, insureds whose directors and officers liability policies are approaching expiration must carefully consider whether they should, or must make a report to their insurer about events that have not yet resulted in a claim, but that may do so after the policy expires. A failure to do so could lead to the unfortunate situation of having continuous coverage in place, but having two insurers each disclaiming any obligation to cover the claim.