This article explains claims made coverage under D&O policies.
All D&O policies reviewed for FC&S D&O provide claims-made coverage. The obligation of an insurer to pay for a claim and related expenses under a claims-made policy is triggered only if a covered claim is first made against the insured during the policy period or the policy's extended reporting period. Claims-made policies contrast with the more common occurrence-basis general liability and umbrella policies, which are triggered by the date the loss or injury occurs, even though the claim may not be made until months or years after the policy expires. A graphic example of the key difference between these two types of policies is shown in the following chart.
Differences between Claims-Made Policy and Occurrence Policy
In the previous example, assume a loss occurs in 2022 but the resulting claim is not presented until 2024. A claims-made policy in effect during 2024 would not provide coverage for the claim. Rather, the 2022 claims-made policy would be called upon to respond to the claim. In contrast, an occurrence-basis policy in effect in 2024 would respond to the claim, since the occurrence resulting in the claim took place in 2022.
The mechanics of claims-made D&O policy forms are not often as simple as depicted in the previous example. Definitions, claim provisions, and other reporting requirements are integral factors in defining the scope of the policy's claims-made features.
The term "trigger," which is used frequently in discussions of insurance coverages, refers to the events or circumstances that actuate the policy's coverage. To determine the policy's trigger requirements, it is necessary to locate and identify the following claims-made features and requirements within the policy form being reviewed. These elements combined constitute the policy trigger.
1. What constitutes a claim and when is a claim made?
2. What are the requirements for reporting the claim to the insurer?
3. What are the time limitations regarding when the wrongful act is deemed to take place?
The policy provisions that answer these questions are often not easy to find, as they may be hidden in the most unexpected parts of the policy. In some cases there may be nothing in the policy to answer the question. For example, while most insurers define claim, many policies do not contain a claim definition.
What Constitutes a Claim?
A good place to start when evaluating the important elements of any claims-made policy is the definition of "claim." An example of a policy definition of "claim" is given below. For a further explanation of claim definitions, refer to Claim, Related Claims, and Potential Claim.
A. "Claim" means:
1. a written demand for monetary damages or non-monetary relief;
2. a civil proceeding commenced by service of a complaint or similar pleading;
3. a criminal proceeding commenced by filing of charges;
4. a formal administrative or regulatory proceeding, commenced by a filing of charges, formal investigative order, service of summons or similar document;
5. an arbitration, mediation or similar alternative dispute resolution proceeding if the Insured is obligated to participate in such proceeding or if the Insured agrees to participate in such proceeding, with the Company's written consent, such consent not to be unreasonably withheld; or
6. a written request to toll or waive a statute of limitations relating to a potential civil or administrative proceeding;
against an Insured for a Wrongful Act, provided, that Claim does not include any labor or grievance arbitration or other proceeding pursuant to a collective bargaining agreement.
A Claim shall be deemed to be made on the earliest date such written notice thereof is received by an Executive Officer.
The "claim" definition varies widely in D&O policies. The absence of a definition of "claim" is not a negative policy feature, however. Some policies that do not define claim provide more liberal coverage than policies that restrictively define "claim."
Claim-Reporting Requirements to the Insurer
Claim-reporting requirements establish when claims made against the insured must be reported to the insurer. Often the policy requires that the claim be reported to the insurer during the policy period, during the policy's extended reporting period, or within a specified number of days after the claim is made. Sometimes language in the policy's insuring agreement includes such requirements, although most policies provide a more elaborate description elsewhere in the policy under captions such as Notice of Claims, Notice, or Claim Reporting. The following are some examples.
Notice Required During the Policy Period
INSURING AGREEMENTS
"The Insurer shall pay the Loss of each and every Director or Officer (hereinafter called the Insureds) arising from any claim first made against the Insureds and reported to the Insurer during the Policy Period by reason of any Wrongful Act."
LOSS PROVISIONS
"The Company or the Insureds shall, as a condition precedent to the obligations of the Insurer under this Policy, give to the Insurer notice in writing of any claim made against the Insureds as soon as practicable and during the Policy Period or during the Discovery Period, if effective ".
Notice Required Within a Specified Time
"The Insured shall give written notice to the Insurer of any Claim otherwise covered under this policy as soon as practicable but in no event later than sixth (60) days after the end of the Policy Period, if applicable, or within the Extended Reporting Period, if exercised."
Notice Required as Soon as Practicable
"If during the Policy Period any Claim is first made, as a condition precedent to indemnity, the Insured Organization must give written notice to Royal Specialty Underwriting, Inc. on behalf of the Insurer by certified mail and properly addressed to the address shown on the Declarations Page, of such Claim as soon as practicable after such Claim is first made and in no event later than the expiration date or any earlier cancellation date of this policy."
Compliance with provisions that require reporting during the policy period, some limited time after claim is made, or some limited period after policy expiration, may be difficult or impossible to meet when claims are made against the insured at or near the end of the policy period. Even under the most favorable circumstances, it may take a number of days to advise the insurer of a claim made against it. The corporate risk manager or other executives responsible for the insurance program may not be available to respond, or the specific procedures and requirements of claim reporting may not be fully understood by the person who actually first receives the claim. Policy forms that do not impose a time limitation upon the insurer and require only that the claim be reported as soon as practicable are preferable to those forms that impose a time limitation.
Reporting Potential Claims
Circumstances that the insureds feel may give rise to a claim also must be reported to the insurer during the policy or extended discovery period. In most cases the insureds are required to provide the insurer with specific details regarding such circumstances. These details are sometimes referred to as specificity requirements. The policy may require the insured to identify the specific wrongful act that is likely to result in a claim, the specific potential injury or damage, the likely claimants and other similar information. Also refer to Claim, Related Claims, and Potential Claim.
Overly restrictive notice requirements may severely impair the insured's ability to trigger the policy as respects claims that may be made in the future. Even when the insured believes a claim is inevitable, unless the specific notice provisions can be met, the policy will not be triggered. Policies that have limited specificity requirements or provisions that require only the insured to describe the general circumstances afford the insured greater control in triggering coverage.
Claims-made reporting requirements imposed on the insured either for actual or potential claims—including provisions that require written notice or special mailing requirements—often have been strictly upheld by the courts.
Retroactive Dates—Time Limitations Regarding When Wrongful Acts Take Place
Many D & O policy forms contain no reference to the timing of wrongful acts. When issued without language to the contrary, most D&O policies provide full prior acts coverage, regardless of the time between when the wrongful act was committed and when the claim is made against the insured.
Frequently, however, policies will contain or will be endorsed with language that is sometimes referred to as a "retroactive date limitation." Such provisions preclude coverage for claims arising from wrongful acts occurring prior to the stipulated retroactive date. Examples of where these provisions may be found are given below.
By Endorsement
" In consideration of the premium charged, it is hereby understood and agreed that this policy only provides coverage for Loss arising out of claim for alleged Wrongful Acts occurring on or after [date] and prior to the end of the Policy Period and otherwise covered by this policy."
Generic wording
"COVERAGE PERIOD: The term "COVERAGE PERIOD" shall mean the period of time from the RETROACTIVE DATE to the termination of the POLICY PERIOD."
1. The insurer may impose a retroactive date that is the same as the policy inception date.
This restriction normally occurs when the insured organization is a newly formed entity, when no previous coverage existed, or when a change in the insurer is made. Underwriters are reluctant to provide coverage for wrongful acts that may have occurred in a prior period, especially if no prior insurance was in force. The risk is that the insurer may inadvertently assume the exposure for an unknown number of wrongful acts that may develop into future claims.
The following chart illustrates a claims-made policy in which the insurer has imposed a retroactive date that is the same as the policy inception date. There is no coverage for claims made during the policy period that are based on wrongful acts that occurred prior to the retroactive date. The shaded area represents this period.
Claims-Made Policy with the Retroactive Date the Same as the Policy Inception Date
A potential problem with all claims-made policies occurs when each successive renewal policy imposes a retroactive date that is the same as the renewal date. This condition is known as "advancement of the retroactive date." When this condition occurs, the policy provides coverage only for claims made and based on wrongful acts occurring during the current policy period. A graphic example follows.
Advancement of the Retroactive Date in a Claims-Made Policy
Retroactive-date advancement normally occurs only when a policy has been cancelled, when the insurer declines to renew, or when the insured changes insurers. New insurers often are unwilling to provide coverage for claims based on unknown wrongful acts committed in prior periods. Another instance when a retroactive-date advancement might occur is when the insurer discovers that the insured has not fully disclosed information considered material to its underwriting decision. Such material could include information about past circumstances that the insurer feels may develop into a future claim. As a condition of renewal, the insurer advances the retroactive date. As a practical matter, however, insurers can advance the retroactive date on any renewal. There usually is no guarantee that a specific retroactive date will be maintained.
2. The insurer may impose retroactive dates that are the same as the expiring policy (commonly referred to as providing "prior-acts" coverage).
Prior-Acts Coverage
The previous example depicts successive policies, each maintaining the original retroactive date of the previous policy. While none of the policies will cover claims based on wrongful acts occurring in the shaded area of the illustration, subsequent wrongful acts would be covered by the policy in effect at the time the claim was brought against the insured. Successive policy renewals maintaining the expiring policy's retroactive date are said to provide "prior-acts" coverage.
3. The insurer may choose to impose no retroactive date or provide provisions stating that all prior wrongful acts are covered (policy provides "full-prior-acts" coverage).
Because this arrangement imposes the least restriction on the insured, it is the most desirable.
As the following chart illustrates, there is no restriction in the 2023 policy as to when the wrongful act must take place, only that a claim based on the wrongful act be made against the insured during the policy period. Full-prior-acts coverage is extremely desirable. It is an improvement over any policy containing a specified retroactive-date limitation. Competing insurers sometimes offer full-prior-acts coverage as an enticement for insureds to switch insurers.
Full Prior-Acts Coverage
Extended-Reporting-Period (ERP) Provisions
Most policy forms contain provisions allowing the insured to extend the policy's coverage to include claims first made after the policy expiration or cancellation for wrongful acts occurring on or after the policy's retroactive date and before the policy's expiration or cancellation. Such provisions are especially desirable in the event of policy cancellation or nonrenewal, or when a renewal policy contains a retroactive date later than the retroactive date of the expired policy. The following generic wording is representative of extended- reporting-period (ERP) provisions:
If the Insurer shall cancel or refuse to renew this policy the Insureds shall have the right, upon payment of the additional premium of twenty percent (20%) of the three year prepaid premium hereunder, to an extension of the cover granted by this policy in respect of a claim or claims which are made against the Insureds, during the period of twelve (12) calendar months after the date of such cancellation or non-renewal, but only with respect to any Wrongful Act committed before the date of such cancellation or nonrenewal.
Extended Reporting Period (ERP)
The following illustration depicts an insured that exercised its policy's twelve-month ERP when the policy was renewed for the 2023 term.
This claim scenario would result in the following:
| Claim No. 1 | Because wrongful act #1 occurred within the retroactive period and a claim was made against the insured within the extended reporting period and with subsequent reporting to the insurer, these actions would trigger the 2020 policy for potential coverage. |
| Claim No. 2 | Although wrongful act number two also occurred within the retroactive period, a claim was not brought against the insured until 2024, after the extended reporting period had expired. Therefore, wrongful act #2 would not trigger the 2021 policy. Unless the 2024 policy contained a retroactive provision that would encompass the date of the wrongful act occurring in 2021, the 2024 policy also would not be triggered. |
| Claim No. 3 | Most ERP language provides coverage only for claims based on wrongful acts occurring prior to the policy expiration date and after the retroactive date. Claims based on wrongful acts taking place during the extended reporting period usually are not covered. In this example the claim was reported to the insurer during the extended reporting period; however, because wrongful act #3 occurred after the policy expiration date, it would be precluded from coverage under the 2022 policy. |
ERPs are desirable because they give insureds some protection if coverage is cancelled or not renewed by the insurer, or if a claim is made against the insured or close to the end of the policy period. ERP language varies among insurers. The value of an ERP depends on a number of factors, including the following:
1. Under what circumstances is the ERP available? 2. For what time period does the ERP apply and at what cost? 3. When and how is the ERP activated?
Under What Circumstances Is the ERP Available?
Most policies allow the ERP to be purchased only when the insurer initiates cancellation or nonrenewal, as illustrated by the following language:
If the Insurer shall cancel or refuse to renew this policy the Insureds shall have the right, upon payment of the additional premium, to an extension of the coverage granted.
The ERP language in the previous example is known as a "one-way tail." A "two-way (or bilateral) tail" is a policy provision that also would allow the insured to cancel the policy and to trigger the ERP. The two-way tail is uncommon in D&O policies, but some insurers provide flexibility when renewal terms are more restrictive than those of the expiring policy. The following language allows the insured to purchase the ERP under such circumstances. This generic language provides coverage for claims made against the insured after the expiration date, which might otherwise be excluded by a renewal policy with reduced coverage or limits.
In the event of renewal on terms and conditions different from those in effect during the POLICY PERIOD, the COMPANY shall have the right, upon payment of an additional premium to be determined by the INSURER, to an extension of the original terms and conditions with respect to any CLAIM first made against any DIRECTOR or OFFICER during the period of ninety (90) days after the effective date of renewal, but only with respect to any WRONGFUL ACT committed prior to the effective date of the renewal. This right of extension shall terminate unless written notice of such election is received by the INSURER within ten (10) days after the effective date of renewal.
It may be argued that when an insurer offers to renew coverage, but only with overly restrictive terms, conditions, exclusions or a substantial increase in premium, the result is virtually the same as a nonrenewal or cancellation by the insurer. If this occurs, the insured might try to enforce the ERP provision by using the argument that the insurer effectively has refused to renew. However, most policies now contain language similar to the following that effectively eliminates this approach:
The quotation of a different premium and/or terms and conditions, including but not limited to deductible amount and/or Limit of Liability, for renewal does not constitute a cancellation or refusal to renew for the purposes of this provision.
Most policy forms contain language that precludes the insured from exercising the ERP when the policy has been cancelled for nonpayment of premium. The ERP also may not be available when the policy has been terminated under change-of-control provisions, which can apply to situations such as mergers and acquisitions. When such events occur, the insurer may reserve the right to cancel or terminate the policy due to a material change in exposure.
For What Period of Time Is the ERP Effective and at What Cost?
Almost all policies clearly define both the period of the ERP and the additional cost. Many ERPs are twelve months, while some insurers provide reporting periods of twelve, twenty-four, or thirty-six months. In some policies, the length and cost of the ERP is not stated but is subject to negotiation between the insured and the underwriter. The premium required to exercise the ERP option usually is a percentage or multiple of the annual premium. This additional premium percentage is normally found within the discovery clause but may also appear on the policy's declarations page.
Not all insurers fully describe the ERP in the policy form. Certain features, such as the period of discovery and additional premium, may be specifically negotiated and may appear on the policy declarations page or in an endorsement. All aspects of the ERP should be fully disclosed and evaluated prior to policy inception. If the ERP is not satisfactorily in place at policy inception, the insured may have difficulty negotiating suitable terms during the policy period.
When and How Are ERPs Activated?
The ERP is typically available upon the insured's request and payment of the total additional premium within a specified number of days after the policy expiration or cancellation date. This length of time is referred to as the "election period." The most common election period is ten days, but some insurers allow an election period of thirty or sixty days. The following generic wording is an example of language describing how the ERP is activated:
"As a condition precedent to the right to purchase the Discovery Period, the total premium for this Policy must have been paid. The right to purchase the Discovery Period shall terminate unless a written request for this Discovery Period is given to the Insurer within ten (10) days after the effective date of cancellation, or, in the event of a refusal to renew, within ten (10) days after the Policy Period ends, together with payment of the appropriate premium for the Discovery Period. In the event that such written request and premium payment is not so given to the Insurer there shall be no right to purchase the Discovery Period at any later date."
This language requires the insured to notify the insurer in writing that the discovery period is desired. Failure to elect coverage under the ERP within the election period and in the fashion described terminates the insurer's obligation to provide such coverage.