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Directors and officers liability insurers want to know what is going on with the companies they insure.
Most companies want to communicate openly with their insurers. While you might think D&O policies would be structured to encourage such communication, as demonstrated by the terms governing reporting of potential claims, that isn't always the case. Paradoxically, reporting a potential claim can be the basis for an insurer's declination of coverage.
Virtually all D&O and similar professional liability policies are written on a claims-made basis. For coverage to apply, the claim must be made while the policy is in effect. D&O policies usually give policyholders the option to provide notice during the policy period of circumstances that could give rise to a claim. If the insurer finds the notice to be sufficient, any future claim based on the circumstances described in the notice will be deemed to have been made when the notice was given.
For those unfamiliar with the policy terms and conditions, the decision whether to provide notice of a potential claim might seem easy. Telling an insurer about a situation that may result in a claim and thereby locking in coverage should be a great idea, right? Not necessarily. If the insurer does not accept the notice as valid and effective, a future claim based on the facts in the notice may not be covered under any policy.
It is not at all certain that an insurer will accept a notice of potential claim as valid and effective. Indeed, they are much less likely to do so now than in years past. Older policy forms typically required only that policyholders submit a general description of the circumstances on which a future claim would be based. Such notices were seldom rejected as insufficient.
Today, most policy forms require notices of potential claims to include a significant amount of very specific information. Policies typically require policyholders to identify the potential claimants and insured defendants, wrongful acts likely to be alleged, dates the acts were committed, reasons for anticipating a claim and how the policyholder became aware of the circumstances being reported. If an insurer deems a notice to be lacking, a policyholder may try and shore it up by supplying additional information. The policy may require it to do so during the policy period, however.
Policyholders might be forgiven for thinking that the notice provisions of modern policies require a degree of clairvoyance. Most insurers understand the problem, and try to be flexible where policyholders have made a good effort to supply the information required by the policy. However, as a handful of court decisions over the past couple of years demonstrate, insurers take the specific information requirements of notice clauses seriously, and do not hesitate to litigate the sufficiency of notices of potential claims when they firmly believe the requirements have not been met.
Generally speaking, courts have carefully enforced the information requirements for notices of potential claims. They have held that general notices, such as one stating that a policyholder's bankruptcy could give rise to D&O claims, are inadequate.
While courts have avoided making stringent technical readings of notice requirements, they have required policyholders to provide each piece of information required by a policy, and have held that an insurer is not required to engage in conjecture or perform an investigation to find information missing from a policyholder's notice.
An insurer's rejection of a notice of potential claim can be fatal to coverage in the event a claim is ultimately made. D&O and other claims-made policies exclude claims arising from circumstances reported to insurers under earlier policies. Such "prior notice" exclusions will apply even if an insurer rejected an earlier notice of potential claim. To be sure, it would be highly unusual for the same insurer to reject a notice of potential claim under one policy and invoke a prior notice exclusion in a subsequent policy. A replacement insurer (or a replacement excess insurer) might not hesitate to raise such a coverage defense, however. Indeed, at least one court held recently that a prior notice exclusion could apply under just such circumstances.
Given the very real risks flowing from a policyholder's failure to provide all of the specific information required by policy notice clauses, where policies make reporting of potential claims optional, companies need to carefully consider whether to provide such notice at all. A policyholder might be better off simply waiting for a claim to be made. If the decision is made to report the potential claim, great care must be taken to give the insurers all of the specific information required by the policy. Failure to do so, and to work closely with insurers' claims staff to manage the acceptance of the notice, could be catastrophic.
William A. Boeck is senior vp, insurance and claims counsel for Lockton Financial Services in Kansas City, Mo.