Cancellation and Termination of Coverage
April 7, 2017
All D&O policies contain language defining the circumstances, timing, and other requirements to effect a cancellation of the policy, either by the insured or insurer. The following is a sample cancellation clause.
D. Cancellation and Nonrenewal
1.The named Company may cancel this policy at any time prior to the Expiration date of the Policy Period by mailing prior written notice to the Insurer or by surrender of this policy to the Insurer or its authorized agent. If the named Company shall cancel this policy, the Insurer shall retain the customary short rate proportion of the premium.
2.This Policy may be cancelled by or on behalf of the Insurer solely for reason of non-payment of premium, by delivering to the Company, or by mailing to the Company, at the address shown in Item 1 of the Declarations, written notice of cancellation at least 10 days before the effective date of cancellation. The mailing of such notice as aforesaid shall be sufficient proof of notice and the effective date of cancellation stated in such notice shall become the Expiration date of the Policy Period. If the Insurer shall cancel this policy, the Insurer shall retain the pro rata portion of the premium hereon. Payment or tender of any unearned premium by the Insurer shall not be a condition precedent to the effectiveness of cancellation, but such payment shall be made as soon as practicable.
3.This policy may be nonrenewed by the Insurer by delivering to the Company, or by mailing to the Company, at the address shown in Item 1 of the Declarations, written notice of nonrenewal at least thirty days prior to the Expiration date of the Policy Period. The mailing of such notice shall be sufficient proof of notice.
Crum & Forster, MP426.1 (04/04)
Cancellation by the Insured
As with most other types of insurance, the D&O policy usually may be cancelled at any time by the insured. However, when the insured cancels the policy, the insurer typically retains what is commonly referred to as a short-rate proportion of the premium, sometimes also referred to as a short-rate penalty. Such provisions impose a penalty based on the unearned premium remaining on the policy at the time the policy is cancelled. Although language may reference “customary” short-rate provisions as in part (1) of the example, many D&O policies are issued without defining the specific proportion or penalty. In such cases, insurers will typically retain 10 percent of the unearned premium as the penalty to offset their fixed expenses incurred in issuing the policy. However, short-rate terms can vary, as illustrated in the following sample short-rate-cancellation table.
Nonstandard Short Rate Cancellation Table
| SHORT RATE CANCELLATION TABLE | ||
| Days Insurance |
| Percent of |
| 1 | ………………………………. | 5 |
| 2 | ………………………………. | 6 |
| 3 — 4 | ………………………………. | 7 |
| 5 — 6 | ………………………………. | 8 |
| 7 — 8 | ………………………………. | 9 |
| 9 — 10 | ………………………………. | 10 |
| 11 — 12 | ………………………………. | 11 |
| 13 — 14 | ………………………………. | 12 |
| 15 — 16 | ………………………………. | 13 |
| 17 — 18 | ………………………………. | 14 |
| 19 — 20 | ………………………………. | 15 |
| 21 — 22 | ………………………………. | 16 |
| 24 — 25 | ………………………………. | 17 |
| 26 — 29 | ………………………………. | 18 |
| 30 — 32 | (1 Month) …………………… | 19 |
| 33 — 36 | ………………………………. | 20 |
| 37 — 40 | ………………………………. | 21 |
| 41 — 43 | ………………………………. | 22 |
| 44 — 47 | ………………………………. | 23 |
| 48 — 51 | ………………………………. | 24 |
| 52 — 54 | ………………………………. | 25 |
| 55 — 58 | ………………………………. | 26 |
| 59 — 62 | (2 Months) …………………… | 27 |
| 63 — 65 | ………………………………. | 28 |
| 66 — 69 | ………………………………. | 29 |
| 70 — 73 | ………………………………. | 30 |
| 74 — 76 | ………………………………. | 31 |
| 77 — 80 | ………………………………. | 32 |
| 81 — 83 | ………………………………. | 33 |
| 84 — 87 | ………………………………. | 34 |
| 302 — 305 | (10 Months) …………………. | 87 |
| 306 — 310 | ………………………………. | 88 |
| 311 — 314 | ………………………………. | 89 |
| 315 — 319 | ………………………………. | 90 |
| 320 — 323 | ………………………………. | 91 |
| 324 — 328 | ………………………………. | 92 |
| 329 — 332 | ………………………………. | 93 |
| 333 — 337 | (11 Months) …………………. | 94 |
| 338 — 342 | ………………………………. | 95 |
| 343 — 346 | ………………………………. | 96 |
| 346 — 351 | ………………………………. | 97 |
| 352 — 355 | ………………………………. | 98 |
| 356 — 360 | ………………………………. | 99 |
| 361 — 366 | ………………………………. | 100 |
Some policy forms contain minimum-premium provisions. These are usually expressed as a percentage of the annual premium (or a fixed amount) that is fully earned if and when an insured cancels the policy. When the precise terms of the cancellation penalty are unknown, the insured should seek written clarification from the insurer.
Cancellation by the Insurer
If the insurer cancels coverage, the cancellation provision generally provides for the pro rata return of unearned premium to the insured, although some insurers may use a specific formula for calculating the return premium that is applied, regardless of which party initiates the cancellation.
All policies require the insurer to give advance notice to the insured if it intends to cancel the policy. Some policies allow for cancellation by the insurer at any time, subject only to notifying the insured of the intent to cancel. Except for the insured's nonpayment of premium, which generally requires only a ten-day prior notice, the typical notice requirement is thirty days. As a practical matter, however, thirty or even sixty days' notification may not provide ample time to remarket a complicated or distressed risk. Sometimes a ninety-day notice can be negotiated, and for particularly difficult risks, an even longer period may be desirable.
Restrictive Cancellation Provisions
A few policies provide for cancellation only under certain limited situations, such as when mutually consented to by insured and insurer or when majority ownership of the insured corporation changes, as illustrated by the following example.
VIII. CANCELLATION
This POLICY shall not be subject to cancellation except as follows:
A.In the event during the POLICY PERIOD:
1.the company named in Item I of the Declarations shall merge into or consolidate with another organization in which the company named in Item I of the Declarations is not the surviving entity, or
2.any person or entity or group of persons and/or entities acting in concert shall acquire securities or voting rights which results in ownership or voting control by such person or entity or group of persons or entities of more than 50% of the outstanding securities representing the present right to vote for election of directors of the company named in Item I of the Declarations, this POLICY shall not apply to any WRONGFUL ACTS actually or allegedly taking place after the effective date of said merger, consolidation or acquisition; however, this POLICY shall remain in force for the remainder of the POLICY PERIOD as to CLAIMS based upon WRONGFUL ACTS alleged to have been committed prior to such date. All premiums paid or due at the time of said merger, consolidation or acquisition shall be fully earned and in no respect refundable.
B.In the event of the appointment by any state or federal official, agency or court of any receiver, conservator liquidator, trustee, rehabilitator or similar official to take control of, supervise, manage or liquidate any entity included within the definition of the COMPANY, or in the event such entity becomes a debtor in possession, this POLICY shall not apply to any WRONGFUL ACTS by the directors and officers of such entity actually or allegedly taking place after the date of such event. This POLICY shall remain in force for the remainder of the POLICY PERIOD from said date as to CLAIMS for (i) WRONGFUL ACTS by any other INSUREDS, and (ii) WRONGFUL ACTS by the directors and officers of such entity alleged to have been committed prior to the date of such event. All premiums paid or due at the time of such event shall be fully earned, and in no respect refundable.
C.This POLICY may be cancelled by mutual agreement and consent of the INSURER, the COMPANY, and the INSUREDS, upon such terms and conditions as respects return premium and/or future premium adjustments and/or loss adjustments as the parties may agree upon at the time of said cancellation.
XL Insurance Company, Ltd., Form D&O-007
Provisions such as this not only provide the insureds with a coverage enhancement, but also may reflect the insurer's integrity and intent to enter into a long-term, uninterrupted relationship. Policy forms containing such provisions are sometimes written on a multi-year basis.
Some older policy forms provide for automatic cancellation of coverage when certain specified events occur, such as when the insured corporation is sold or merged or consolidated within another entity. There is little consistency between such policy forms regarding automatic termination of coverage and care should be taken to identify the specific events that apply to such provisions. Sometimes the sale of a majority of the corporation's assets can trigger automatic termination of the policy. These provisions are sometimes referred to as self-destruct clauses. The following example provides for cancellation when specified events occur, and also contains a self-destruct clause.
This POLICY shall not be subject to cancellation except as follows:
(a)In the event during the POLICY PERIOD:
(1)the company named in Item 1 of the Declarations shall merge into or consolidate with another organization in which the company named in Item 1 of the Declarations is not the surviving entity, or
(2)any person or entity or group of persons and/or entities acting in concert shall acquire securities or voting rights which results in ownership or voting control by such person or entity or group of persons or entities of more than 50% of the outstanding securities representing the present right to vote for election of directors of the company named in Item 1 of the Declarations, this POLICY shall not apply to any WRONGFUL ACT actually or allegedly taking place after the effective date of said merger, consolidation or acquisition; however, this POLICY shall remain in force for the remainder of the POLICY PERIOD as to CLAIMS based upon WRONGFUL ACTS alleged to have been committed prior to such date. All premiums paid or due at the time of said merger, consolidation or acquisition shall be fully earned and in no respect refundable.
(b)In the event of the appointment by any state or federal official, or court of any receiver, conservator, liquidator, trustee, rehabilitator or similar official to take control of, supervise, manage or liquidate any entity included within the definition of the COMPANY, or in the event of such event shall be fully earned, and in no respect refundable. With respect to CLAIMS first made after the date of such event for WRONGFUL ACTS by the directors and officers of such entity, (I) the LIMIT OF LIABILITY of this policy for the remainder of the POLICY PERIOD shall be a continuation of the same limit, and not a separate limit, as was in effect during the POLICY YEAR in which such event occurred; and (ii) such CLAIMS shall be deemed to have been first made during the POLICY YEAR in which such event occurred for purposes of the LIMIT OF LIABILITY.
(c)This POLICY may be cancelled by mutual agreement and consent of the INSURER, the COMPANY, and the INSUREDS, upon such terms and conditions as respects return premium and/or future premium adjustments and/or loss adjustments as the parties may agree upon at the time of said cancellation.
(d)This POLICY may be cancelled by the INSURER upon granting of 365 days written notice, providing such cancellation is determined to be appropriate by the Chief Executive Officer, the Executive Vice President for Underwriting and the Executive Vice President for Claims of ACE Limited. Payment or tender of any unearned premium by the INSURER shall not be a condition precedent to the effectiveness of cancellation, but return of the pro rata unearned premium shall be made as soon as practicable.
(e)In the event the charged premium for any POLICY YEAR is not paid as provided in Clause 7 (Automatic Extension), above, this POLICY shall not apply to any WRONGFUL ACTS actually or allegedly taking place after the anniversary date on which the additional premium was due; however, this POLICY shall remain in force for the remainder of the POLICY PERIOD as to CLAIMS first made during the POLICY PERIOD for WRONGFUL ACTS actually or allegedly caused, committed or attempted prior to such anniversary date. With respect to all CLAIMS first made after such anniversary date, one LIMIT OF LIABILITY shall apply for the remainder of the POLICY PERIOD. Such LIMIT OF LIABILITY shall be separate from the LIMIT OF LIABILITY provided during the POLICY YEAR immediately preceding such anniversary date. All premiums paid as of such anniversary date shall be fully earned and in no respect refundable.
CODA 01 (05/96)
Issues that may arise with cancellation provisions involve allegations by insureds that the insurer's notice of cancellation was not received or that it was not received in a timely fashion or by the proper person. The obvious problem is that the mailing of such notice does not guarantee receipt by the individuals responsible or capable of dealing with such matters.
Many policies contain cancellation or authorization clauses that state that the corporation is the responsible and authorized party for the giving and receiving of notice between the underwriters and the insureds. When the number of individuals who may act on behalf of the corporation is large, an attempt should be made to have the notice or authorization provisions amended to specifically name the position (such as general counsel or risk manager) charged with responsibility for the D&O insurance. Requiring the notice to be posted registered return receipt helps ensure that the appointed individual has been notified.
Policies that provide restrictive or inflexible cancellation notice provisions can cause problems if coverage cannot be replaced within the notice period. When the insurer will not provide an adequate cancellation notice, preplanning for the possibility of cancellation can decrease the lead time needed in certain areas, such as in the application process. Updating and keeping underwriting data current on at least a quarterly basis can save valuable days gathering information and reports.