With persisting soft market conditions and an influx of new carriers and policy forms, the renewal of an organization's directors and officers liability insurance policy often signals an opportunity for the insured to achieve better coverage terms and a lower premium.

However, if the insured moves D&O coverage–or any other claims-made coverage–to a new carrier to obtain such benefits, might there be undetected gaps in coverage?

Beyond the obvious coverage terms and pricing, there looms the question of coverage continuity.

At its core, continuity is “something that remains consistent or uninterrupted throughout.” In the film industry, the term continuity is often used to refer to consistency in the details from one part of a film to another.

In the world of liability insurance, continuity refers to making sure that coverage is consistently maintained without gaps as the insurance is renewed each year. There are several issues that pertain to continuity of coverage:

o Application warranties

o Continuity dates

o Prior-and-pending litigation dates

o Prior acts retroactive dates

When coverage is first written for an insured, the insured typically fills out a long-form application that includes “warranty” questions. These questions relate to the insured's knowledge of any past or present events or conditions that could result in a claim.

A typical wording for this type of question is, “Is any person or entity proposed for this insurance aware of any act, circumstance or situation which may result in a claim against the organization or any of its directors, officers or employees?”

Each senior officer in the organization should at that point in time review the completed application and be prepared to answer that question. Once the chairman, chief executive officer or president signs the completed application, it becomes an official part of the policy and is relied on by the insurer when issuing coverage.

The application, with the warranty statement, is critical to the carrier's handling of future claims.

Many insureds move coverage without considering the potential coverage gaps that may result from the warranty question. If an insured answers “No” to the above warranty question, they may be in for an eye-opening experience when a future claim arises.

For example, if the insured is currently in bankruptcy and does not disclose it to the new carrier, one of two things will happen.

First, if subsequent to binding coverage the new carrier somehow learns of the bankruptcy, the carrier may use the omission on the application as cause to rescind or restrict coverage. The carrier may maintain that the bankruptcy is a material fact that was not disclosed and, subject to the severability clause in the policy, may attempt to rescind the policy.

Alternatively, the carrier may specifically exclude coverage for any claims arising out of the situation that was not disclosed. (Severability and rescission issues as they relate to the application/submission are topics for another article.)

Second, if a D&O claim arises stemming from the bankruptcy, the carrier may deny coverage based on the failure to disclose material information.

Two solutions to these problems may be available:

o The agent or broker may ask the carrier to accept a renewal application rather than a new business application.

Typically, D&O renewal applications do not contain the warranty language and the insured would avoid having to answer such a question.

o If the carrier refuses to accept a renewal application and insists that a new business application be completed, the agent or broker may request that the carrier not require the insured to answer the warranty question.

This seems a fair compromise in situations when the carrier needs more information than a renewal application would provide.

Some uncertainty or ambiguity exists in the use of the terms “continuity date” and “prior and pending litigation date”. One pertains to the timing of the application warranty and the other pertains to the timing of prior litigation–and the dates in question may or may not coincide.

Continuity date typically refers to the first date that the insured bound coverage using a new business application with a warranty statement. That date is sometimes, though not always, specified on the policy declarations page or by endorsement.

It is important when the insured considers moving coverage to a new carrier that they not only remove or not answer the warranty question but that they also backdate and match the continuity date.

The prior-and-pending litigation date (P&P Date) also often relates to the date that coverage was bound for the first time, but–distinct from the application warranty date–the carrier's purpose in specifying a P&P Date is to exclude coverage for any claims arising from litigation of any nature that existed prior to the date specified.

On the surface, it may seem reasonable to think that a new carrier would not be responsible for a claim that arises out of prior litigation. But a potential coverage gap arises when the prior litigation, as initially constituted, did not trigger the definition of “claim” under the claims-made policy in question, but a later “claim” is spawned by such prior litigation.

For example, consider a workers' compensation-related lawsuit involving an insured and an employee. Such litigation would most likely not trigger coverage under a D&O/EPL policy. If, however, the employee in question is later terminated by the insured and sues the insured for wrongful termination based on retaliation for the workers' compensation litigation, and if the prior workers' compensation litigation preceded the D&O/EPL policy's P&P Date, the carrier may attempt to deny the wrongful termination claim because it was based upon or arose from the prior litigation.

A similar example is a products liability lawsuit that eventually causes a severe financial crisis for the insured, which in turn leads to a D&O lawsuit. If the initial products liability litigation preceded the D&O policy's P&P date, the D&O carrier may deny the eventual D&O claim because the financial problems underlying the D&O claim arose from the products liability litigation.

Situations like the ones above can be avoided by having the new carrier backdate the P&P Date to match that of the expiring D&O policy. The new carrier would typically agree to match the P&P Date upon receiving a copy of the expiring policy's declarations page or endorsement evidencing the date.

The carrier may or may not also require loss runs and litigation history prior to agreeing to match the date.

Prior acts retroactive dates are used to exclude coverage for any claims arising from any of the insured's acts that took place prior to the date specified, regardless of any warranties, and regardless of whether there was any actual or threatened litigation.

It is rare to see a prior acts retroactive date used in a D&O policy–even for new buyers of the coverage.

When a carrier does impose a prior acts retro date on a new buyer of D&O coverage, it is typically because there were past events or conditions that were so onerous that the carrier found it necessary to exclude claims arising from any and all prior activities of the insured.

In the case of a renewal, it would be equally rare for a new carrier to attempt to impose a prior acts retroactive date, unless the prior D&O carrier is nonrenewing coverage and the insured is purchasing an extended reporting period under the expiring policy. Absent this situation, an insured would be ill-advised to move coverage to a D&O carrier seeking to impose a prior acts retroactive date.

Given the economic challenges confronting many industry segments today, it is not unrealistic to expect an increase in D&O claims activity. Therefore, although the above concepts are not new, it seems an opportune time to revisit continuity issues.