November 2014 – Premier Risk Management

Risk Tip: Ensure proper notification is stated clearly in your policies

The “notice” provision in all insurance policies should be modified to mean notice to a “specific individual”.

Comment: Here is another one of those “missed” clauses. How many times have you heard a client say “I never received the notice”?

Just recently a prospect was explaining to me that they received a letter from a law firm placing them on notice of a potential claim. “Someone” at the front desk apparently signed for the letter but it never reached the person in charge of handling the insurance. A second request was received but months later, which was finally forwarded to the insurance carrier. Unfortunately, the second letter placing the insurance carrier on notice was submitted after the expiration of the prospect’s claims made policy. The insurance company held their position that they would not defend on the basis of late notice because the first letter the plaintiff’s attorney sent was in fact signed for by the insured and they should have placed the carrier on notice at that time. Obviously this was a big problem. One way to avert that from happening is to have the insurance policy state that proper notice/knowledge of claim must go to a specific person before the clock starts ticking.

Another clause to be aware of is the “Time for Suit” language and time frame. This clause places a time constraint on when an insured can bring suit against the insurance carrier; typically it is a one year time period. Here to an insured must be aware of these provisions while thinking through various claim recovery scenarios. While suing the insurance carrier is a “last resort” action, important time parameters such as these must be acknowledged and working into any loss recovery strategy.

Bottom Line: The insurance company knows what every single word of the contract means and how various clauses will work at the time of a loss or claim – make certain that you know how your policies will work in the event of a claim or loss.

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Do you really know your D&O coverage?

Whether your organization is a publicly held company, private company or nonprofit it is vitally important to have a thorough understanding of the corporate charter and its indemnification of corporate officers and directors and how the directors and officers’ (D&O) insurance policy protect their interests and that of the entity.

Not all policies are the same nor are their meanings. D&O policies differ from carrier to carrier in many respects – while the primary coverage issue is to indemnify corporate directors and officers for defense expenses as well as settlements and judgments made against them – how each carrier does that is the real issue. There are very subtle differences. Let’s take a look at a couple of examples.

What are the coverage concerns?

D&O policies typically contain three coverage parts:

Side A: protects officers and directors when the company does not indemnify them
Side B: reimburses the company when it does indemnify the officers and directors
Side C: covers claims against the company itself

Pay attention to the coverage because company or corporate insiders’ interests don’t always coincide with directors and officers’ interests. That is what happened to five former directors of a defunct company where they were put in the position of having to pay $41.5 million of their own money to settle a lawsuit stemming from a company’s bankruptcy. To avoid this possibility, directors should demand a “Side A” policy of their own. This option has been very popular for several years now. These types of policies are also referred to as independent director liability or IDL policy; it can’t be exhausted by claims against the company or the officers.

Claims denial – one aspect. The insurance carrier may deny coverage for reasons unrelated to the claim against you. Insurers can rescind a D&O policy – return the premium and pretend as though there had never been coverage – if they conclude at a later time that the application contained false or misleading information. Seems reasonable. Insurers today require that financial statements be attached to the application. The problem here is that if your CFO cooked the books unbeknownst to you, this could nullify the policy. To avoid this scenario affecting other board members that have clean hands, it is important to pay attention to the severability clauses contained in the policy. This prevents the insurer from using the acts of one bad actor to disqualify other officers and directors from coverage. However, an even better scenario is to find an insurer to write a policy that is non-rescindable and non-cancelable.

Outside the U.S., directorship may not be covered. D&O policies may provide international coverage but the fine print reveals that it is only “to the extent possible.” This is very vague. Some countries including India, China, Russia and Brazil require that companies maintain local D&O policies. It is therefore important to purchase additional D&O coverage outside the U.S.

Bottom Line: It all begins with the corporate charter and indemnification provision contained therein. Before considering D&O coverage you must have an understanding of how the corporate charter works and who and what should be protected. Then when dealing with D&O policies and coverage make sure that you have a full understanding of the terms and conditions that are incorporated into that particular policy – you may be surprised by who and what is actually covered (or not) and how the policy will respond in the event of a claim (when the rubber meets the road).

Are you OK with being surprised?