What do all construction and real estate companies have in common? They have directors or managers and officers concentrating on running the companies and remaining profitable. Most companies maintain Directors and Officers (D&O) insurance to protect these important stakeholders from liability and lawsuits that can arise from their work. Because there is no standard form D&O policy, it is important to pay attention when placing and renewing this insurance.
D&O coverage traditionally offers three different insuring provisions. The first is referred to as Side A coverage and provides defense and indemnity directly to directors and officers when claims are made against them. The second, or Side B coverage, reimburses a company that makes defense or indemnity payments on behalf of directors and officers. Finally, Side C coverage provides coverage directly to the company. A company need not, and often does not, obtain all the available coverages. But the decision on which coverages to buy should be considered carefully. While expectations initially may be that a company is going to defend and indemnify directors and officers, certain allegations can alter a company’s obligation, and direct coverage may be required to keep an officer from incurring expense out of pocket.
In this first of a two-part blog, I will address avoiding gaps in coverage, knowledge of insureds, the definition of who is an insured, and notice. In a future blog, I will address arbitration provisions, choosing policy limits, and defense provisions.
Avoiding Gaps in Coverage
As mentioned above, D&O policies are not standardized. Different carriers use different forms, and therefore provide different coverages. When renewing coverage with a new insurer, for example, the new insurer may include different retroactive dates, or dates for prior acts. Historically, when you renew with the same carrier, those restrictive dates remain the same, but new carriers may want to move those dates up. By moving those dates, prior acts that may not yet have led to a claim may no longer be covered if a claim does arise. The insuring provisions and exclusions in the new policy should also be closely reviewed to make sure that the same or broader coverage is provided. If there is excess coverage, do the excess policies follow the same form as the primary policy, or are there different provisions? Finally, there can be benefits and risks of having your entire insurance program with the same carrier. If you have the same carrier, it becomes more difficult for that carrier to try to pass off a related (e.g. employment) claim to a different carrier. On the other hand, where claims may trigger different policy types, having different carriers could lead to having more coverage available to pay for the defense and any settlement or judgment. Again, this is a complicated analysis and requires time and attention.
Knowledge, and Existing Claims or Suits
An important issue in many D&O claims is who had knowledge of an event that could lead to a claim and when they obtained that knowledge. Knowledge can affect when the insurer must be notified of a clam or possible claim and can lead to denials of coverage. Many D&O policies have provisions that specifically dictate who must have knowledge in order to invoke the obligation to provide notice. It is best if the person or persons designated is specific and limited. For example, requiring notice when the risk manager or general counsel becomes aware of the claim or potential claim may be reasonable. It is also advisable that the policy contain a provision that knowledge be severable. That way, if a bad-acting director has knowledge and fails to provide notice, that failure will not adversely affect other insured directors and officers or the company. Additionally, there are often exclusions for intentional or criminal acts. Many policies provide that those exclusions will not apply unless the intentional or criminal act is finally adjudicated. In those instances, the policy may have to provide a defense and possible contribution to settlement if a finding is never made.
The Definition of Insured
Who is defined as an insured under the policy matters. If the purpose of the policy is to provide coverage only to directors, managers and officers, the policy should reflect that. Often the definition of “insured” will include employees, which substantially broadens and dilutes the coverage provided. Policies may also include past directors or officers. Again, this can substantially affect coverage. If employees, or officers who have been gone for five years, are covered, and they bring a claim, insurance may be precluded by the insured versus insured exclusion in the policy. It may seem counter-intuitive, but the broader the definition of insured in the D&O policy, the less insurance may be provided when you apply standard exclusions. Determine who you want covered by the policy, and then make sure the definition fits that decision
Reporting Periods and Notice of Circumstances
We touched on notice above when discussing the importance of who must have knowledge of a claim. The question is often asked, when should I provide notice to my insurance carrier? The answer to that question from the standpoint of an attorney who represents policyholders is tender the claim early and tender the claim often. There is very little cost in providing notice to your carrier. If the claim goes nowhere, it will have little effect. Insureds are often afraid that if they tender a claim it will have an adverse effect on their premiums. In my experience, absent exceptional circumstances, that is not the case. However, the contrary is almost always true. Big claims almost always are initially considered to be small. If they are not noticed early, the insurer will use the benefit of 20/20 hindsight to argue that notice should have been provided sooner. Notice provisions may require notice to be given as soon as practicable, or within a certain defined period. Either way, make sure that the language of the notice provision does not state that compliance is a condition precedent to coverage. Without that language, many states, including Minnesota, require late notice to cause actual prejudice to the insurer before it will be enforced. Additionally, if you are changing carriers, review the language of the policy and strongly consider an extended reporting period, especially if the new carrier shortens the retroactive or prior-acts dates.
In a future blog, I will address arbitration provisions, choosing policy limits, and defense provisions.
Larkin Hoffman’s insurance coverage department can help you and your business assess its insurance and maximize coverage. You can contact Chris Yetka at firstname.lastname@example.org.