The document discusses notice-prejudice requirements in directors and officers (D&O) liability insurance policies. Specifically, it notes that:
1) Historically, insurers wanted prompt notice of claims so they could manage them efficiently, while insureds wanted longer reporting periods to avoid denials for late notice.
2) D&O policies typically require claims be made and reported during the policy period, or within a short extension like 60-90 days.
3) Recently, some insurers have further extended reporting periods and adopted "notice-prejudice" rules where they must prove late notice materially prejudiced them to deny coverage.
4) The author sees risks for insurers
1. Notice-Prejudice Requirements in D&O
Policies
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Published on December 7, 2015
Li keNot i ce- Pr ej udi ce Requi r em ent s i n D& O Pol i ci es
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Shar eShar e Not i ce- Pr ej udi ce Requi r em ent s i n D& am p; am p; O Pol i ci es
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Keith Daniels
Consultant - Financial Advisor - Comprehensive Planning - Insurance -
Investments
I have been considering the article of November 23, 2015 written by Joe Monteleone of
Rivkin, Radler and posted on www.dandodiary.com. Historically, a major issue in
managing claims and in policy drafting for D&O and E&O policies has been the timely
notice of a claim. The insurer obviously wants notice as soon as possible of a claim made
against an insured in order to manage the claim and hopefully obtain an efficient claim
result. Insureds, on the other hand, oftenwant the longest time period possible in which
to report a claim, so that they can avoid the problem of late notice and having a claim
denied on that basis.
The basic two-pronged requirement of a claims made and reported policyis that (1) the
claim against an insured must be made during the policy period, and, (2) the claim must
be reported to the insurer within the policy period, or within some expressed "cut-off"
date after expiration of the policy. As many insureds asserted, if a claim is made at the
very end of a policy period, it might take some time for the Risk Manager, General
Counsel, etc., to be served and become aware of a claim. Thus, carriers have been
willing to provide this extra time, typically 60 or 90 days after policy expiration, or to
2. use as soon as practicable language. However, in either case, timely notice has been
necessary and the courts have held up requirements as it is not unreasonable for an
insurer to require notice before its interests are prejudiced by the insured's actions or
inaction in regards to a claim.
The trend of the past years, as capacity remains large in the market and the pressure to
write business has not decreased, is for new carriers to enter the market and offer broader
coverages than the legacy carriers, who then must offer broader coverage to compete with
the newer carriers, and so on and so on. Despite the fact that courts have enforced notice
prejudice language in most cases, we are seeing broader provisions come into the
market.
Extending the notice provisions to 90 or 180 days, as some carriers have done, could
result in a claim being made and not reported to an insurer for almost 18 months. As a
former claims counsel, I perceive great peril for carriers in that situation.
Now, in some large company D&O forms, the insurer is taking on the burden of proving
that in order to deny coverage for failure to provide timely notice unless the Insurer can
demonstrate that its interests were materially prejudiced byreason of such late
notice.
From a legal perspective, this is an amazing extension of coverage being offeredand
there is no legal precedent requiring it that I am aware of at this time. I can foresee
frustrated claims managers in the future often feeling that their only role is to cut a check
when a D&O claim comes in if they have no notice-prejudice rule to rely upon.
As is oftenthe case, when the horse gets out of the barn, it is hard to get it back in. If
insurers later decide that this language is unwise, it will be very difficult, if not
impossible, to pull back to language much closer to the historic basis. Even if the market
does "harden" in terms of rates and premium increases, this language, along with other
coverage extensions which have been made in D&O policies over the years, may be
difficult to reverse. Even if there is no legal precedent so requiring them in the first
place.
I leave it to Joe's article for specific legal references and his views may or may not track
my own.
What do you think?
Keith Daniels is an attorney who served as coverage counsel on D&O, EPLI and
professional liability claims for Lloyd's of London syndicates and other carriers
while in private practice; and as a product manager and product development
director on management and professional liability products. He has analyzed
3. numerous carriers policies and has written several policies in use by several
carriers today.
His opinions in this article are his own and do not represent the views of anyone
else or any other entity.