A directors’ and officers’ (D&O) liability insurance is usually a claims-made policy. What this means is that it only covers claims that occur and are reported when the insurance policy is active.
A claims-made policy is different from a claims-occurred policy because, in the latter, the insurance that was active when the incident occurred has to cover the claim. This means the insured might have to go back to a previous insurer to file a claim. In a claims-made policy, the insurance that is active when the insured notifies or informs a claim, pays it, even if the incident occurred when some other insurance was active.
Benefits of a claims-made D&O liability insurance policy
A D&O policy provides coverage for incidents from its inception date to its end date or till the present, provided that the insured renews the policy. This insurance provides coverage against error, negligence, misleading statements, acts or omission, or breach of duty and ensures reputational and financial stability.
A claims-made policy has certain unique benefits:
– low-cost premium for the first few years because the period of exposure is short
– cover for past, present, and future directors
– cover for prior acts with the retroactive settlement.
One must remember though that while premiums may be low initially, they tend to increase over time. As coverage extends over a greater span of time, exposures increase, resulting in a higher premium cost.
Inception date and retroactive date
The focus in a claims-made policy is always on the date of notification of the claim and the alleged incident date. To settle your claim without hassles, inform the insurer about the potential claim as soon as you become aware of it. Informing the insurer about the claim during the policy term period is crucial in a D&O liability policy.
Generally, the retroactive date is the inception date. However, one can extend coverage back to a specific date from which all losses and contingencies would be covered. The insured can negotiate the policy term period and avail coverage for prior acts.
Let’s assume the insurance inception date is 1 January 2020. But the insured negotiates with the insurer and uses a retroactive date option to extend D&O policy coverage back to 1 January 2018. In this case, the insurer will cover all loss incidents from 1 January 2018. However, not all insurers provide this facility. And those that do, will charge an additional premium for it. Some may offer this coverage if the D&O policy does not have any break in renewal. The insurer requires “some” policy to have been in place when the incident occurred even if that was not their own insurance.
An objective of the insurer and insured is to ascertain the specific retroactive date from which coverage would be implemented. This is important because it is fairly common for the insured to make claims for incidents that took place in the past.
Case study: Incident notification date critical for cover
A company purchased a D&O policy for a term period of 2018-2019. A client, alleging that a director had manipulated a certain contract’s details, filed a case against him in November 2018. Unfortunately, the company did not inform the insurer of the claim.
The insurer learned of the claim after the policy term period ended although the company knew of the incident earlier. The insurer did not pay the claim because the company did not report it during the policy term period. Although the incident occurred during the policy’s term period, the company notified the insurer after the policy had ended. So, the claim was not valid for a claims-made policy such as D&O.