What is the Warranty Statement on a D&O or Employment Practice Liability Policy?

I’ve been asked on several occasions when a client is applying for Employment Practice Liability Insurance (EPLI) or Directors & Officers Insurance (D&O) if a potential claim or “situation” in the past would be covered by their new policy?  This article will explore how the Warranty Statement found in most all management and professional liability policies works.

The simple answer is probably not, and I’ll explain in a moment.

A possible claim could be something as subtle as a disgruntled employee making rumblings about not being happy with their job, or it could be something as serious as a formal inquiry by a government agency such as the EEOC. Regardless of how subtle or serious the potential issue is, doesn’t really matter, because all EPLI, D&O and other management or professional liability policies have something known as the warranty statement in their applications. The warranty statement asks whether the applicant is aware of any facts or circumstances or situations which could give rise to a claim. Different insurers will word their warranty statement differently. Some insurers will have a separate section dedicated to the warranty with a big check mark box, others will ask the question as part of prior claims history.

Here’s a couple of examples of what the warranty statements may sound like:

• Is the Applicant, or any person proposed for this insurance aware of any fact, circumstance, situation, event or act that reasonably could give rise to a claim against them under the
  Liability Coverage for which the Applicant is applying? If Yes, please attach an explanation.
• No person or entity proposed for coverage is aware of any fact, circumstance, or situation which he or she has reason to suppose might give rise to any claim that would fall within the scope of the proposed liability coverage parts. NONE____ Except:

As you can see the question is broadly worded to force the applicant to disclose any possible rumblings of a potential claim or situation.

Some clients when completing this will ask me something like: “what if I don’t want to disclose something, or I don’t think it was serious enough to give rise to a claims?”

In these situations the applicant is obviously hedging – something is “in the wind” or even more serious than that and they’re afraid to disclose it to the underwriter. My advice is to answer the question truthfully and fully. If it’s giving you pause to even wonder if you should disclose it, then in all likelihood it should be disclosed.

What happens when you do disclose actual or possible claim situations?

In my experience the underwriter will continue to offer you terms and premiums similar to what had previously been proposed prior to taking the application, but they will ask for more details about the claim, situation, or circumstance and then waive that/them out of the new policy by exclusion. Now, if the situation was as serious as rampant sexual harassment by an employee over the past few years, chances are good that you will not be offered coverage – at any price!

When I explain this to a client I will occasionally be asked: “What happens if I don’t disclose something minor and it does eventually turn into a claim?”

Here the client is playing with fire, on two fronts. The first issues is that most management, professional and cyber applications contain fraud warnings just prior to the signature page. These warnings indicate that in most states any person who knowingly attempts to defraud an insurance company, conceals information or provides misleading information shall be subject to civil and or criminal penalties. So, if you don’t disclose material facts when asked, you could be the subject of serious penalties. Certainly not worth the risk!

The second issue for failing to disclose information is that if that “situation” does actually lead to a claim and you submit it to your insurer, they will likely find out during the discovery stage of the claim that you were not truthful in completing the warranty statement and had prior knowledge of the circumstances which are giving rise to this claim. When that happens, the insurer has no obligation to continue your defense, so they close their file and you’re back to square one, paying for defense out of pocket.

The bottom line is that the warranty statement is put there by the insurer so they can avoid insuring the “burning barn”. Much in the same way an insurer does not want to insure a structure already on fire for property insurance, it’s too late to apply for employment practice liability coverage if you know or think a claim may be occurring in the near future.

One last technical note is that your application for D&O, employment practice liability or cyber coverage becomes part of your policy and is relied upon for coverage guidance. You should only be signing a warranty when you are first applying for coverage, or when there’s been a break in the coverage. You should NOT be signing a fresh warranty statement up a renewal.

Have other questions regarding employment practice liability insurance?  Drop me a line or give me a call, we’d be happy to discuss your particular situation.