The D&O Insurance Application
August 29, 2015
D&O liability insurance is underwritten based on information provided by the insured when completing an application for insurance. Because D&O insurance often affords coverage for prior wrongful acts, the D&O insurance application helps underwriters avoid insuring unknown risks.
In addition, the application usually attaches to and forms an integral part of the policy form. This is important because most D&O applications often contain conditions, warranties, or reporting requirements that some insureds might normally expect to be found within the policy form. For this reason, important coverage elements or restrictions may go unnoticed unless careful scrutiny is given to the application.
D&O applications, sometimes referred to by insurers as proposals, can be tedious for the insured to complete, requiring much detailed information and the attachment of numerous corporate records, reports, and documents. Insureds seeking coverage for the first time, replacing expired or canceled coverage, or seeking to change insurers, will often be required to complete an initial application. These are sometimes referred to as long-form applications because of the depth of information requested. Long-form applications as a minimum seek the following:
•General or background information, including full description of operations, state of incorporation, annual sales, total assets, etc.
•Description of the specific limits and deductibles sought
•Information regarding stock ownership
•Information regarding subsidiary operations
•Information about who will be insured under the policy
•Disclosure of anticipated changes in the corporation's operations involving merger, acquisition or divestiture
•Specific corporate policies regarding takeover activities and limitation of director or officer liabilities
•Regulatory information if the insured is a financial institution
•Current, prior and pending claim information
•Attachment of corporate filings, records and documents
The exact information requested can vary greatly, depending on the individual insurer and specific class of business under consideration. Financial institutions, healthcare organizations and not-for-profit associations generally all require the completion of specialized applications. Most applications will also contain statements regarding warranty and imputation of liability as respects the information provided and require the signature of the president and/or CEO of the organization.
Insureds placing or renewing coverage with the same insurer are usually required to complete a renewal application. These are sometimes referred to as short-form applications. The term short form, though, can be misleading, as many insurers require the completion of applications that can be as detailed as the initial application. As a general rule, however, renewal or short-form applications often omit the requirement of the insured to provide claim information and soften or eliminate some or all warranty provisions.
Whether a first-time submission or renewal of existing coverage, completion of the application should not be undertaken casually. Insurance brokers or agents experienced in placing D&O insurance can provide valuable assistance to the insured in this area. While such assistance should not include the agent or broker actually completing the application on behalf of the insured, the experienced agent or broker can help guide the insured and help assemble and produce a coherent and well-organized application. While all questions should be answered truthfully and completely, the following areas should be given special attention.
Representations
Most D&O policy forms and applications for coverage contain conditions and warranties that all insured directors and officers should be familiar with. Such conditions and warranties can act as guarantees by the insureds that the information in the application is complete and correct. Misrepresentations that materially affect the underwriting of the risk can result in claims being denied or total rescission of the policy. Such provisions may be found in the application and/or in the policy form, as illustrated later in this article.
Contained in Application
2. It is declared that this application and any materials submitted or required (which shall be maintained on file by the Insurer and be deemed attached as if physically attached to the proposed Policy) are true and are the basis of the proposed Policy and are to be considered as incorporated into and constituting a part of the proposed Policy.
3. The undersigned declares that to the best of his/her knowledge the statements set forth herein are true and correct and that reasonable efforts have been made to obtain sufficient information from all of the Insured Persons to facilitate the proper and accurate completion of this application for the proposed Policy. Signing of this application does not bind the undersigned to purchase the insurance, but it is agreed that this application shall be the basis of the contract should a Policy be issued, and this application will be attached to and become part of such Policy. The undersigned agrees that if after the date of this application and prior to the effective date of any Policy based on this application, any occurrence, event or other circumstance should render any of the information contained in this application inaccurate or incomplete, then the undersigned shall notify the Insurer of such occurrence, event or circumstance and shall provide the Insurer with information that would complete, update or correct such information. Any outstanding quotations may be modified or withdrawn at the sole discretion of the Insurer.
4.The information requested in this application is for underwriting purposes only and does not constitute notice to the Insurer under any Policy of a claim or potential claim. All such notices must be submitted to the Insurer pursuant to the terms of the Policy, if and when issued.
CNA, G-133042-A (11-07)
Contained in Application
Your Duty of Disclosure
Section 21 of the Insurance Contracts Act 1984 provides that before you enter into a contract of general insurance with an insurer, you have a duty to disclose to the insurer every matter that you know, or could reasonably be expected to know, is relevant to the insurer's decision whether to accept the risk of the insurance and, if so, upon what terms. You have the same duty to disclose those matters to the insurer before you renew, extend, vary or reinstate a contract of general insurance.
However, your duty of disclosure does not require you to disclose matters:
that diminish the risk to be undertaken by the insurer;
that are of common knowledge;
that your insurer knows or, in the ordinary course of its business, ought to know;
as to which compliance with your duty is waived by the insurer.
This duty of disclosure continues after the proposal form has been completed up until the Policy Period commences.
Consequences of Non-Disclosure
If you fail to comply with your duty of disclosure, the insurer may be entitled to reduce its liability under the contract in respect of a Claim or may cancel the contract. If your non-disclosure is fraudulent, the insurer may also have the option of avoiding the contract from its beginning.
AIG, D&O Proposal Form (03-05) [Australia]
Contained in Policy Form
In granting coverage to the Insureds under any Coverage Section, the Insurer has relied upon the declarations and statements in the Application and upon any declarations and statements in the original written application submitted by the Insureds to another insurer with respect to the similar coverage incepting as of the respective Continuity Date set forth in Item 7 of the Declarations. All such declarations and statements are the basis of this policy and shall be considered as incorporated in and constituting part of this policy.
The Insureds represent that all such declarations and representations are true and shall be deemed material to the acceptance of the risk or the hazard assumed by the Insurer under this policy. The Insureds agree that in the event that any such declarations and representations are untrue, this policy shall be void ab initio and shall not afford any coverage with respect to any of the following Insureds:
1.any Insured Person who knew the facts that were not truthfully disclosed in the Application;
2.the Company, to the extent it indemnifies any Insured Person referenced in 1. above;
3.the Company and any Benefit Program if any Executive Officer of such Company or Benefit Program knew the facts that were not truthfully disclosed in the Application; and
4.all Insureds if the person signing the Application knew the facts that were not truthfully disclosed in the Application;
whether or not the Insured Person or Executive Officer described in 1., 2., or 3. above knew that the Application contained such untruthful disclosure.
Zurich American Insurance Company, U-PDO-100-A-CW (05/03)
Contained in Endorsement
At least one insurance company has issued an endorsement which in effect also adopts the warranties and representations of a competitor's application.
RELIANCE UPON APPLICATION MADE TO ANOTHER CARRIER
In consideration of the premium charged, it is hereby understood and agreed as follows:
1. In granting this coverage, the Insurer has relied upon the Competitor's Application and the statements, warranties and representations contained therein as being accurate and complete as of the Date Signed. The Insureds extend any warranties and representations in the Competitor's Application to the Insurer and further warrant and represent to the Insurer that the statements and representations made in the Competitor's Application were accurate and complete on the Date Signed. All such statements and representations shall be deemed to be material to the risk assumed by the Insurer, are the basis of this policy and are to be considered as incorporated into this policy.
2. “Competitor's Application” means the application of the Named Applicant(s) to the Other Carrier for the Type of Coverage reflected in the following table:
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If such application form was submitted to the Other Carrier in connection with a renewal of coverage, then “Competitor's Application” shall also mean all previous policy application forms submitted to that Other Carrier for any policy of which this policy is a renewal, replacement or succeeds in time. “Competitor's Application” also means all the materials submitted with or incorporated by reference into any of the application forms referenced above.
3. “Application” shall also mean the Competitor's Application.
We find this type of endorsement to be highly undesirable and onerous.
A great concern for individual insureds is that misrepresentations by a single officer in completing the application may void coverage for all directors and officers, including those who were unaware that any misrepresentations were made. In most cases directors and officers who are beneficiaries of the policy
may have no direct involvement in completing an application.
Two cases that addressed this issue were Bird v. Penn Central Co., 334 F. Supp. 255 (E.E. Pa. 1972) and Shapiro v. American Home Assurance Co., 584 F. Supp. 1245 (D. Mass. 1984). In both cases the officers signing the application made misrepresentations of which other insureds were unaware and the courts upheld the insurer's rescission of the policy.
In the Bird case, the court found that the application's signing officer, who made the misrepresentation, was acting as an agent for and on behalf of the corporate entity and the directors and other officers.
The insurance company successfully argued that this agency relationship was grounds for rescission of the policy based on a material misrepresentation.
The court in the Shapiro case took a somewhat different approach rejecting the notion of “agency.” The court simply held that as long as the misrepresentation was material to the underwriter's decision to accept the risk, the insurer was entitled to rescission, which precluded coverage for all of the policy's insureds, including those who were innocent of any wrongdoing.
The judicial posture in these cases suggests that a high degree of diligence be exercised by individual insureds to ensure that each question in the application is answered correctly.
A particularly troublesome problem with some applications involves questions about the directors' and officers' knowledge of any act, error, or omission that might give rise to a future claim under the policy. The following application provisions are representative of how such questions are worded.
2.No person(s) or entity(ies) proposed for this insurance is (are) cognizant of any situation which (s)he (they) has (have) reason to suppose might result in a future claim such as would fall within the scope of the proposed insurance, except as follows: (If answer is “None”, so state)
3.Is the undersigned or any person(s) proposed for this insurance aware of any fact, circumstance, situation, act, error, or omission involving the Applicant or those other entities or person(s) proposed which (s)he has reason to believe might result in a future claim such as would fall within the scope of the proposed insurance, except as follows: (If answer is “None”, so state)
It is agreed by all concerned that if any of the policy insureds is responsible for or has knowledge of any wrongful act, fact or circumstance, or situation not described above, any claim subsequently emanating therefrom shall be excluded from coverage under the proposed insurance as to such insureds. Such responsibility or knowledge shall not be imputed to any other of the insureds for the purposes of determining the availability of coverage.
Paragraphs 2 and 3 in the above example are included to affirm that the applicants have no knowledge or information of any act, error, or omission that might give rise to a future claim. While knowledge of certain acts, omissions, or events might be easily identifiable as having the potential of materializing into a claim, other actions, errors, or omissions might go unnoticed or appear so innocuous that the insured might not expect a claim to develop. It is possible that an insured could have knowledge of certain actions but, because there may be no reason to suspect a claim, might answer the question in good faith that no such circumstances were known.
The last paragraph in the previous example goes on to say that if such knowledge exists but has not yet been disclosed, any resultant claim(s) would be excluded. The language might be interpreted to mean that a claim could be denied even though the insured had no reason to suspect a claim to materialize. Warranty provisions like those noted in the previous example act as broad exclusions for claims based on prior acts of which the insured had knowledge or which the insured should have suspected would give rise to future claims.
Great care should be taken in answering these types of questions. In response to some questions it may be wise to provide a conditional answer. A simple yes or no response might not fully answer the question and could restrict coverage if later interpreted as a breach of warranty. The completer of the application might consider describing how the answer was verified. Were all insureds polled and asked to review the application? If so, responses by the application preparer also might include the qualification that, to the best of his or her knowledge and having polled the prospective insureds, he or she does not have knowledge of any circumstances reasonably likely to give rise to a claim.
It may also be difficult or impossible for individual directors to verify the sometimes voluminous amount of information required by the application. Even for boards that have established a procedure for all board members to review the application, it may be difficult for any director, and particularly a new director, to verify the accuracy of all entries to the application. There probably are many insured executives who are unaware that the validity of their individual insurance protection hinges on the truthful and complete execution of the application.
Material Misrepresentations and Coverage Implications
Most insurers consider the insured's responses to questions in the application to be material representations or material facts. Some applications also contain statements that all documents and attachments are material to the insurer's acceptance of the risk and agreement to provide coverage.
The exact impact of such statements and the meaning of the word material is not always well understood by insureds. In matters of insurance, a material fact is often considered to be information that would increase the risk to the insurer and influence the underwriter's decision on whether to offer coverage. Material facts are also those that could affect the premium or scope of coverage offered.
While some insurers may state that all information in the application is material, it is likely that some information is more material than other information, or that misrepresentations could be made that would not be material at all. The overstatement of financial records that reflect net worth of $100 million versus $99 million may be insignificant, but the failure to report adverse claims history may have a great influence on the insurer's decision to provide coverage. The degree to which misrepresentations are deemed to be material can have varying effects on whether or not coverage would be available under the policy. Without specific language to the contrary, a misrepresentation made in the application may cause the insurer to attempt to:
•Deny coverage for specific types of claims
•Deny coverage for specific insureds
•Rescind the policy
While the first two actions certainly are undesirable, the policy could presumably continue in force for future claims not otherwise affected by the misrepresentation. Rescission, on the other hand, means that the policy would be annulled and claims treated as if the contract had never been made.
Policy Rescission Issues
If information submitted to the Insurer during the underwriting process is false, the Insurer's primary remedy is potential rescission of some or all coverage under the policy. If successful, rescission voids the coverage ab initio (i.e., “from the beginning”), and thus the coverage is deemed to never have existed. The theoretical justification for this remedy is that the Insurer would not have agreed to issue the policy at the agreed upon terms if the true facts had been disclosed, and therefore the Insurer should not be required to provide the coverage which was obtained under false pretenses.
The specific requirements for insurer rescission of the policy differ from state to state. Generally, an Insurer usually must prove some or all of the following five elements:
(1) Making of a False Representation
Most states require the insurer to establish (1) that the insured made a representation, and (2) that the representation was false. Usually, these elements are not in dispute if the insurer can establish that the insured's answer to a question in a signed application is false.
Issues most frequently arise with respect to these two elements where the Insured submits an unsigned application, where no written application is submitted, or where the insured fails to disclose material information even though such information was not requested by the Insurer. Even in the absence of a written application, however, the insurer may still be able to argue that an insured made misrepresentations which entitle the insurer to rescind coverage.
(2) Materiality
Almost all states require that a misrepresentation be material in order to justify rescission of the policy. In most of these states, a misrepresentation is deemed material if it influenced the insurer's acceptance of the risk, calculation of the premium charged, or estimation of the risk involved. The Insurer must prove it would not have issued the policy, or at least would have required different coverage terms or premium, if it had known the true information.
Some states require the Insurer to establish that it would not have issued the policy at all had it known the truth of the matter misrepresented. In these states, if knowledge of the truth would have merely caused the Insurer to increase the premium charged or change the conditions and terms of the policy, the insurer would not be permitted to rescind the policy.
(3) Reliance
Most states require that an insurer prove it relied on the insured's misrepresentation in issuing the policy. This reliance is usually considered closely related to materiality, and some courts interchange these two elements. The insurer must prove to the court that it reasonably relied on the information furnished by the insured in connection with the underwriting of the policy. In addition, almost all states provide that the insurer is under no obligation to independently investigate the statements contained in an application beyond its regular underwriting practices—such duty exists only if the insurer had knowledge of information that warned it of the falsity of answers in the application.
(4) Scienter or Intent
Some states also require the insurer to prove intent to deceive (scienter) by the insured in order to rescind the policy. The specific requirements of this scienter element vary from state to state. For example, some states require the insurer to establish that the insured specifically intended to deceive the insurer in connection with the underwriting and issuance of the policy. In contrast, other states merely require the insurer to show that the insured either knew the information was false when published or acted in bad faith, such as by making a false statement without any knowledge as to its truth or signing the application without reviewing the contents to ensure they are correct.
Under the latter version of this scienter element, the insured need not intend to specifically deceive the insurer, and in fact need not even know what facts were disclosed to the insurer. Rather, knowledge of a false publication to third parties generally is sufficient. Thus, insureds who may not be involved in completing the coverage application may satisfy this intent requirement and lose coverage.
(5) Attached to Policy
As a condition of rescission based upon false statements in an application, a few states require the application be physically attached to the policy. A statement in the policy or application that the application is deemed to be attached and incorporated into the policy may not be sufficient to satisfy this requirement. State law may determine whether actual attachment of the application to the policy is a required element for a successful rescission action.
The elements of rescission summarized above apply to rescission based on misrepresentations to the insurer. Some states recognize a distinction in the insurance context between misrepresentations and warranties made by the insured. In contrast to a misrepresentation, breach of a warranty can entitle an insurer to rescind a policy without proving materiality, reliance, or scienter because the mere falsity of the warranted information is sufficient to void the policy. In other words, it is much simpler for an insurer to rescind a policy due to an Insured's breach of warranty as opposed to a misrepresentation.
Because breach of warranty requires a lesser standard of proof than a misrepresentation, courts are often reluctant to construe statements by insureds as warranties. Also, statutory or common law in many states provides that statements in an insurance application either constitute or are presumed to constitute representations and not warranties.
Warranty Exclusion
In some situations, an insurer may have an option of excluding coverage rather than rescinding coverage based upon a misrepresentation in the application. For example, many applications include an exclusion as part of the warranty statement, which states that if circumstances or wrongdoing which could give rise to a future claim exists prior to inception of coverage, any subsequent claim arising from such circumstances or wrongdoing is excluded from coverage.
It is usually easier for an Insurer to invoke the exclusion rather than rescind coverage, since the elements of rescission summarized above do not apply to an exclusion from coverage.
As a result, some D&O insurers are endorsing the policy with a warranty exclusion in lieu of or in addition to a warranty statement in the application.
Severability Provisions
Many insurers include in their policies or applications (or both) a severability clause regarding statements made in or in connection with the application. These clauses typically provide that the omissions, misrepresentations, and warranties made by one insured shall not be imputed to another insured for the purpose of determining the insured's right of recovery under the policy.
Issues relating to application severability are not new under a D&O insurance policy but are now being given unprecedented attention for several reasons, including the following:
•During much of the 1990s' soft insurance market, D&O insurance applications sometimes were not used, thereby reducing the instances when coverage defenses based on misrepresentations in the application arose.
•Insurers are now more frequently requiring long-form applications (which contain broad warranties and representations), because insureds are more often buying more insurance from new insurers.
•In the aftermath of numerous recent corporate accounting debacles and the resulting claims severity, insurers have been forced to adopt more protective and prudent underwriting practices.
•The increased frequency of financial restatements and allegations of corporate fraud in recent years has led to an increased focus on rescission issues.
•In the post-Enron era, outside directors are demanding greater assurance that their insurance coverage will be available regardless of the conduct of other insureds.
There are several different types of severability provisions utilized by D&O insurers A “full” or “broad” severability provision either states that the application is deemed to be a separate application by each insured or states that the knowledge of one insured is not imputed to another insured for purposes of the application. If the policy includes entity coverage, this full severability provision usually states that only the knowledge of certain executive officers of the insured is imputed to the organization for purposes of determining coverage for the organization. These full severability provisions are intended to preserve coverage for an insured even if another insured knew facts that should have been but were not truthfully disclosed to the insurer during the underwriting process.
A “limited” severability provision states that the knowledge of one insured is not imputed to another insured for purposes of the application, except that the knowledge of either the signer of the application or that of certain designated Executive Officers is imputed to all insureds. Hence, under this limited severability provision, coverage for all insureds could be rescinded by the insurer if the signer of the application or any of the designated Executive Officers knew of the false information that was disclosed in the application. If any insured other than the signer or designated Executive Officer knew such information was false, severability would apply, and the insurer would only be able to rescind coverage for the insured who knew of the misrepresented information.
Examples of limited and broad severability provisions are provided.
Limited Severability Provision
XII. REPRESENTATIONS AND SEVERABILITY
(A) In granting coverage to the Insureds under this Policy, the Company has relied upon the declarations and statements in the written application(s) for this Policy. Such declarations and statements are the basis of the coverage under this Policy and shall be considered as incorporated in and constituting part of this Policy.
(B) Solely with respect to any Liability Coverage Section(s), any written application(s) for coverage shall be construed as a separate application(s) for coverage by each Insured Person. With respect to the declarations and statements in such application(s):
(1) no fact pertaining to or knowledge possessed by any Insured Person shall be imputed to any other Insured Person for the purpose of determining if coverage is available; and
(2) only facts pertaining to and knowledge possessed by the Chief Financial Officer, President, Chief Executive Officer or Chairperson of any Insured Organization or any other individual signing such application(s) shall be imputed to any Insured Organization for the purpose of determining if coverage is available.
Chubb, 14-02-3795 (Ed. 04/01)
Broad Severability (Including Nonimputation of Exclusions)
The acts, omissions or warranties of any DIRECTOR or OFFICER shall not be imputed to any other DIRECTOR or OFFICER with respect to the coverages applicable under this POLICY.
Aegis, 6100 (1/2000)
Broad Severability
The “insured persons” and the “company” represent that all information and statements contained in the “application” are true, accurate and complete. All such information and statements are the basis for our issuing this Policy and shall be considered as incorporated into and constitute a part of this Policy. In the event that the “application” contains any misrepresentation or misstatement of a material fact, this Policy shall not afford coverage to any “insured person” who knew of such misrepresentation or misstatement.
ISO Executive Risk, B24775 (8/97)
The existence and quality of an application severability provision can be critically important to directors and officers. For claims that cannot be indemnified by the organization (e.g., settlements in shareholder derivative suits and situations where the organization is insolvent), the personal assets of the defendant directors and officers may be at risk unless the D&O insurance coverage can be preserved through a severability provision.
However, even if the D&O policy provides full severability, “innocent” directors and officers still have a risk that the insurer may rescind their coverage under certain circumstances. Because knowledge or intent may be irrelevant to a rescission analysis, the existence of a severability provision may likewise be irrelevant. In other words, the insurer may be able in certain circumstances to rescind the entire policy even if the policy contains a full severability provision. This risk depends in part on the type of alleged misrepresentation in the application.
The type of facts that the insurer must prove in order to rescind coverage varies from state to state. At a minimum, the insurer generally must prove that the insureds made representations to the insurer that were materially false and upon which the insurer relied in underwriting the policy. Most states do not require the insurer to prove the intent to deceive. Therefore, an unintentional mistake by the insured can be sufficient to justify rescission if the insurer relied to its detriment on the false information. However, some states require the insurer to prove that the insureds either intended to deceive the insurer or had knowledge of the misrepresentation in order to rescind coverage. Fortunately for insureds, many insurers today are including some form of limited severability provision in their policies.
Because the accurate and honest completion of the application has important implications on coverage, care must be taken to ensure that the scope of the application's questions and severability provisions are fully understood. The most favorable severability clauses protect innocent insureds in all situations.
Other Considerations
While the main purpose of the application may be to convey information to the underwriter, it often includes important conditions in addition to those already discussed.
Reporting Requirements
Many applications contain explicit requirements that if information contained in the application changes between the time the application is executed and the time coverage is effected, the insured must report such changes.
If there is any material change in the answers to the questions in this Application before the policy inception date, the Applicants must immediately notify the Company in writing, and any outstanding quotation may be modified or withdrawn.
Chubb Group of Insurance Companies, D&O EliteSM, 14-03-0565NY (6/2009 ed.)
In the previous example, any outstanding quotation may be modified or withdrawn, which means that the terms and conditions as well as pricing may change. The insurer also may withdraw the offer to provide insurance altogether.
D&O applications often are submitted to underwriters well in advance of the proposed inception date, making it likely that at least some information will have changed by the time the policy takes effect. It is important to advise the underwriter of any changes that have occurred in order to comply with the specific reporting provisions. These reporting provisions vary. Some policies may impose strict requirements that such changes be reported immediately and in writing. Other policies may soften the requirement by requiring only that material changes be reported.
Some applications contain provisions which require the insured to notify the insurer and provide certain documents as they become available throughout the term of the policy, such as the example below from an old National Union application.
It is agreed that the Corporation will file with the Insurer, as soon as they become available, a copy of each registration statement and annual or interim report which the Corporation may from time to time file with the Securities and Exchange Commission.
National Union, Application 47384 (8/88)
It is unclear whether such above provision could be the basis for policy recission should fraud be alleged as part of a restatement of financial statements.
Maintenance of Scheduled Insurance
While no longer common, some insurers in the past have required the insured to maintain in force a specific schedule of insurance during the proposed D&O policy period. This type of provision may impose an onerous burden on the insured to report changes in its insurance program. Also, changes in market conditions may make certain coverages or limits of coverage unavailable or unaffordable. It is unclear what impact such market conditions this might have on the D&O policy. A better requirement from the insured's standpoint would be a statement that the insured will endeavor to maintain the specified levels and types of insurance, and that changes in limits and retentions will be reported “as soon as practicable.” The following example from an old CNA financial services D&O application is illustrative of the requirement to maintain specified insurance.
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IT IS REPRESENTED AND AGREED THAT THE ABOVE COVERAGE AMOUNTS WILL BE MAINTAINED BY THE ENTITY AND ITS SUBSIDIARIES DURING THE POLICY PERIOD OF THE PROPOSED INSURANCE AND THAT THE INSURER IS RELYING UPON SUCH REPRESENTATION WHEN ISSUING A POLICY.
CNA, Application G-11885-A (Ed. 08/88)
Information About The Coverage Provided
The application may also provide the insured with pertinent information regarding important or unusual policy features, such as claims-made or defense provisions. While these features normally are fully described in the policy form, statements in the applications like those that follow would make it even more difficult for the insureds to claim they were unaware or unfamiliar with these important and often restrictive features.
NOTICE: THE EXECUTIVE LIABILITY AND ENTITY SECURITIES LIABILITY COVERAGE SECTION PROVIDES CLAIMS MADE COVERAGE, WHICH APPLIES ONLY TO “CLAIMS” FIRST MADE DURING THE “POLICY PERIOD,” OR ANY EXTENDED REPORTING PERIOD. THE LIMIT OF LIABILITY TO PAY DAMAGES OR SETTLEMENTS WILL BE REDUCED AND MAY BE EXHAUSTED BY “DEFENSE COSTS,” AND “DEFENSE COSTS” WILL BE APPLIED AGAINST THE RETENTION AMOUNT. THE COVERAGE AFFORDED UNDER THIS COVERAGE SECTION DIFFERS IN SOME RESPECTS FROM THAT AFFORDED UNDER OTHER POLICIES. READ THE ENTIRE APPLICATION CAREFULLY BEFORE SIGNING.
Chubb Group of Insurance Companies, Executive Liability and Entity Securities Liability Coverage Application 14-03-0488 (Ed. 11/2002)
Confidentiality
Some of the information requested in the application may be sensitive or proprietary. In some instances, the required disclosure of proposed or pending merger or acquisition activity or other sensitive matters may present problems. The insureds may be bound by confidentiality or nondisclosure agreements that prevent them from releasing such information. Because of this, the response to the insurer's inquiry may require careful drafting. An acceptable response normally can be developed that will meet the insurer's needs for underwriting information while keeping the insured within bounds of legal and contractual confidentiality requirements. Some applications contain a statement of confidentiality by the insurer, which at least in part addresses concerns many applicants may have that the information be used by the insurer internally for underwriting purposes only. Absent this statement on the application, most insurers should be willing to provide such a statement in writing upon request.
The fact that the completer(s) of the application may not be privy to information that is being inquired about underscores the importance that the officers signing the application are completely informed or briefed as to the questions being asked and answers disclosed. The rubber-stamping of an application by the president or CEO can have a catastrophic effect should relevant information be inadvertently omitted or a question answered incorrectly.
Renewal and Continuity Considerations
Warranty provisions in applications completed by insureds when they first apply for coverage require that particular care be taken to ensure complete and honest execution of the application. Most renewal applications with the same insurer, however, do not require the insured to rewarrant the application as respects knowledge of information that may give rise to future claims. This difference is significant. The warranty by the directors and officers that they have no knowledge of information or circumstances that would likely give rise to a future claim is, in a sense, an exclusion for prior acts that were known or which, in some instances, should have been known by the insureds.
It is an important advantage not to have to provide a fresh warranty each time the policy renews. The fact that most renewal applications with the same insurer do not have this requirement is a great incentive to remain with the same insurer. The following exhibit graphically depicts application of the “no knowledge” warranty provisions.
In the previous illustration, when the insured changes insurer (January 2015), the insured is warranting that no circumstances, act, error, or omission is known that is likely to give rise to a claim. Any claim made against the insureds during the 2015 policy period based on a wrongful act taking place prior to January 2015 will be closely scrutinized by the insurer. If it is determined such circumstance or wrongful act was known, or in some cases should have been known, by the insured, the claim may be denied. In some instances, however, competing insurers may not require a fresh rewarranty in order to overcome the obvious competitive disadvantage. In conjunction with any rewarranty clause, the wording of any severability clause also should be evaluated.
Year 2000 (Y2K) Questions
The Year 2000 (or Y2K) Problem was the name given to problems that could have arisen because computer software, devices, and systems using a two-digit date system might not recognize the Year 2000. Potential problems included financial-accounting and bank systems shutting down or being unable to recognize, process, or post transactions; airplanes, automobiles, and other equipment failing to operate properly; governments and institutions shutting down; as well as a whole host of other calamities.
From an historical perspective, in addition to the possible high cost of gaining Y2K compliance and possible catastrophic loss associated with not becoming compliant, the corporation and its directors and officers could have faced shareholder litigation over such events. Specifically, corporate directors and officers could have been targets, particularly those who failed to adequately inform investors of the enormous costs of gaining Year 2000 compliance or who did not warn investors of the potential losses the Y2K problem might cause.
To protect themselves, many D&O insurers attempted to limit Y2K claims by asking the insured to confirm information regarding whether the organization had identified a potential Year 2000 problem and to explain what actions had been or were being taken to mitigate or prevent potential loss.
Most D&O insurers no longer include Y2K questionnaires with their new and renewal coverage applications; however, similar date-recognizing exclusions still may be issued as endorsements by some insurers.