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D&O Insurance Policy Exclusions

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D&O Insurance Policy ExclusionsTwo common D&O Insurance Policy Exclusions:

The Prior and Pending Litigation Exclusion and the Prior Acts Exclusion.

 

There are two common exclusions applied to D&O or Directors and Officers Liability coverage which have to do with the time before the first policy’s inception that new buyers are often confused by.   

They are the prior and pending litigation exclusion and the prior acts exclusion.

 

 

Let’s dig in and see what they’re all about. 

The first D&O Insurance Policy exclusion to discuss is the Prior & Pending Litigation Exclusion – often called the P&P exclusion it is common for a D&O underwriter to set the Prior and Pending date as the inception of a new policy.  This means that any prior or pending litigation before the inception of a new policy is not covered.   

It doesn’t matter when the wrongful act occurred which gave rise to the litigation.  It doesn’t matter if the signatory on the app knew about it or not, it just matters that if there is any prior litigation or pending litigation before the inception date on the policy, it’s going to be excluded. 

This exclusion is also known as the burning building exclusion because underwriters don’t want to sign onto a new building policy if they knew the building was already on fire.   

You will see a P&P exclusion on most new policies and when an insured switches from one D&O insurer to a new insurer.  The new underwriter in this renewal scenario wants to make sure that claims which have arisen in the past are filled with the appropriate previous insurers and covered there and not on the new policy. 

Now you may be saying, how in the world would this exclusion ever get triggered or why would it ever be a problem. 

Here’s an example of a situation that may cause the P&P exclusion to be triggered. 

Let’s say your company hasn’t had a D&O policy in the past and there is a turnover of leadership.  This can happen in an M&A or a re-org.   

New leadership is brought in and they realize there’s no D&O Insurance.  Recognizing how important that is, they complete a new D&O app, submit it and the policy is issued.  The prior and pending litigation exclusion date is set at inception – meaning the start date of the new policy.   

Everything seems fine until a lawsuit arrives at the president’s doorstep, and the new leadership team finds out they are being sued individually for a claim that originally was brought against the entity two years earlier which they did not know of.  They file the claim with their new D&O insurer, only to have that claim denied because of the P&P exclusion. 

Not that common of a scenario, but it can happen.

The second D&O insurance policy exclusion to review is the Prior Acts Exclusion.  This exclusion will not provide coverage if the wrongful act which leads to a claim occurred before the inception of the policy.   

The differentiating factor between the two exclusions is that Prior Acts will exclude claims after the inception of a new policy if the underlying facts or circumstances happened before the inception date (or date set by the underwriter).   

Here, we’re not talking about actual litigation – it’s the wrongful acts such as a misstatement, misleading statement, breach of duty, etc. which may have occurred in the past that triggers a claim after the inception of the policy. 

The prior acts exclusion is much more difficult to deal with because the “insureds” who should be understanding the application process may not have any idea of what “acts” could have transpired in the past which may give rise to a claim in the future. 

So, why do underwriters apply a prior acts exclusion to a D&O policy? 

Good question and the answer is because the first new D&O policy is a starting point and to make it affordable for the insured and profitable for the insurer, the underwriter only wants to cover claims which technically start after the inception date of the policy.   

The opposite of a prior acts exclusion is to have no retro date on your policy to grant full prior acts coverage. 

 So that’s a brief overview of the prior and pending litigation exclusion and the prior acts exclusion in a D&O policy. 

My name is Gordon Coyle and if you’re looking for help on D&O insurance or any other form of business insurance, give me a call, let’s chat.  No pressure, no sales gimmicks just some conversation to see if I can help you and if we might be a good fit for your business insurance needs.  I work in all 50 states and love solving insurance and risk problems and issues for business owners.  Click the button below to get the process started and I look forward to chatting with you.

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