For directors, officers, and professionals alike, nothing is more fear inducing than facing a large lawsuit while being uncertain if your insurance program will respond or not. There are however some steps that can be taken to minimize the likelihood of claim denials. In part 1 (below), we discuss some policy structure considerations.
- AVOID DUPLICATE COVERAGE. Nearly all professional and management liability policies contain clauses that apply coverage in a secondary/excess manner if there is other (equal) insurance in force. Such a clause will typically state: "If any Loss under this Coverage Part is insured under any other valid and collectible insurance policy (other than a policy that is issued specifically as excess of the insurance afforded by this Coverage Part), this Coverage Part shall be excess of and shall not contribute with such other insurance, regardless of whether such other insurance is stated to be primary, contributory, excess, contingent or otherwise." This creates a risk of carrier coverage disputes (finger-pointing) as to who is responsible for the defense and payment of any claim which can result in delayed claim handling. In order to avoid the potential for such disputes, duplicate coverage should be addressed by transferring any limits to the broader policy and cancelling any remaining policies. In situations where there are particular reasons for the maintenance of multiple policies, terms should be properly negotiated with the carriers in advance in order to address which carrier is primary and which is excess.
- BUYING EXCESS? BRIDGE THE GAP. AND CHECK FINANCIALS. When purchasing excess liability, particularly towers of D&O insurance, ensure any excess policies do not require the underlying limits to be exhausted solely by the carrier. In certain claim circumstances, the underlying carrier may fail to exhaust its limits. While the damage may surpass the limit of the underlying policy, the policy limit itself may not be exhausted, thus creating a situation where the excess carrier could decline coverage based on a still-remaining primary policy limit. In order to avoid any coverage declinations, insureds should ensure their excess policies include clauses that allow excess coverage to be triggered by self-bridging any coverage gap (if needed). Lastly, it’s important that insureds check the financial strength of any carriers participating in the tower in order to avoid any potential issues created by insolvency of a participating carrier. Both of the points well demonstrated by the Commodore case from 2013, discussed here.
- CONSIDER SIDE-A DIC. Side A DIC (difference in condition) insurance provides many advantages. Most importantly, it provides “drop-down” coverage which acts as broader primary coverage effectively filling a number of the coverage gaps of the primary underlying policy. Some of those may include softer fraud exclusions and/or the removal of the “professional services” and “pollution” exclusions (among others). Additionally, Side A DIC also helps ensure the underlying carrier will not wrongfully decline a claim.
- PERFORM A BASIC, YET THOROUGH REVIEW. There are certain policy terms and definitions that should be amended in order to avoid any issues during a claim. These are just a few basic examples:
- Oral demands: Due to the fact that oral demands/claims are very subjective, it can be difficult to know if or when a claim was actually made. Does an email from an upset investor qualify? How about a threat to file a future complaint or lawsuit? Most insureds would likely dismiss any such aggrieved communications as actual claims, however this mistake can result in the carrier declining coverage based on late notice. For cautious policyholders, such a definition could result in the reporting of numerous demands that never wind up substantiating into actual claims which can have an adverse effect on renewals and future premiums. While including oral demands/claims may seem like a policy enhancement, it is often better to remove such claims from the definition entirely due to their ambiguity.
- Notice Of Circumstances: Professional and management liability policies contain “notice of circumstance” provisions that allow policyholders to provide the carrier with written notice of circumstances that could give rise to a future claim. When such claims fully ripen, this helps “lock in” coverage that would otherwise be deemed to have been made outside the reporting period. Some insurers however contain wording within the notice clause that requires the insured to report any circumstances that could give rise to a future claim as a condition precedent to coverage. Such a clause will typically read, “The Insured, as a condition precedent to this policy, shall provide notice the company as soon as practicable if any insured has any basis to believe that any insured has breached a professional duty or to foresee that any such act or omission might reasonably be expected to be the basis of claim”. This carries similar problems to the above issue of “oral claims” – there is a lot of ambiguity in the language here. What exactly constitutes reasonable expectation of a future claim? Such a requirement would burden the insured to cautiously report circumstances that may never result in any claims, out of the fear of compromising coverage. Conversely, reporting such circumstances may result in the carrier deciding to non-renew the policy, forcing the insured to replace coverage (assumingly at a higher premium).
- Severability and Reporting: Ensure the policy contains adequate application and exclusion severability to maintain coverage for innocent directors/officers that were unaware of any accused wrongful acts or application misrepresentations. Any for policies that are “claims made and reported”, it is important to ensure the automatic extended reporting period allows for sufficient time for claim reporting. Some policies provide only 30 days after renewal which is a bit too restrictive – policies should generally allow for 60-90 days after the policy period to report any claims.
- PARTNER WITH SPECIALISTS. Partnering with an experienced professional/management liability broker (and ideally attorney) is a critical step in securing strong coverage. Specialty brokers will perform policy assessments that help uncover any problematic language, and perform coverage negotiations in an attempt to achieve more favorable coverage terms (often at little or no additional premium). These negotiations can often mean the difference of a claim being paid or denied.
- BE CAREFUL WHEN RENEWING OR REPLACING COVERAGE. When renewing or replacing coverage, be as aggressive as possible when it comes to maintaining continuity. This entails carefully coordinating/maintaining any retroactive dates, continuity dates and prior/pending litigation dates. Companies changing from “claims made” policy forms to “occurrence” forms should also be aware of the need for purchasing policy “tails” in order to maintain coverage for claims that might arise from wrongful acts that took place during the “claims made” policy period. Additionally, at renewal (or when replacing coverage), companies should insist on utilizing a renewal application when able – as renewal applications do not contain new warranty sections. The argument against completing a new warranty statement is that; the insurer can utilize the signed warranty to decline coverage, reasoning that the circumstances that gave rise to the claim should have been known about and disclosed on the application. The insurer may also argue that coverage would not have been offered should they have been aware of said “potential claim”. If the carrier insists on a new business application and new warranty, be sure to notify them of any circumstances that could give rise to any future claims (if asked).
Please stay tuned for part 2 when in which we discuss some advice for claim reporting.