What is Timely Notice When Reporting a D&O Claim?
There is a section known as Reporting or Claims Reporting in most D&O or Directors and Officers Liability Insurance policies. Within that section of the policy there will be wording that says something like:
The insured shall give to the insurer written notice of any Claim as soon as practicable.
What is practicable in a D&O Claim?
And maybe more importantly,
What is a Claim?
Let’s look at this from a practical standpoint.
First, insurers will litigate D&O claims more than any other policy due to the complexities of the policy form and the dollars at stake. This means that insureds need to take appropriate steps to prevent preclusions of coverage when a potential claim is or maybe in the works.
Now, many decision-makers will receive threatening letters during their careers from law firms that may have a language that sounds like potential wrongful acts covered by a D&O Policy, yet the executive discounts these threats as puffery or posturing or empty and never consider reporting the threat to their insurer.
I’ve seen it, and I think there are two reasons why insurers don’t report these threatening letters to their insurers. The first is they’re afraid their rates will go up, even if nothing happens, and second, they think they’ll work out the situation themselves.
To answer the first issue – underwriters will not increase your premiums on renewal if you have reported potential claims or threats and nothing happens.
The answer to the second issue is, you’re playing with fire. Thinking you’ll work things out and not report a situation to your insurer is dangerous, and I don’t suggest ever doing this.
It is far better to be safe than sorry.
Now, let’s examine what a claim is or how a claim is defined in most D&O policies.
A claim means:
- A written demand for monetary damages or non-monetary relief > that’s a pretty broad statement.
- A civil proceeding commenced by the service of a complaint or similar pleading > I think this is what most insureds think a claim actually is.
- An arbitration proceeding commenced by a receipt of a written demand for arbitration or similar document;
- A criminal proceeding commenced by the return of an indictment, information or similar document, or
- Formal administrative or formal regulatory proceeding commenced by filing a notice of charges, entry of a formal order of investigation, or similar document.
Taken as a whole, this definition’s wording is extensive and can give an insurer enough ammunition to wiggle out of a claim if they choose to use late notice as a cudgel.
While there are several legal concepts such as the “notice-prejudice rule,” which says that your insurer must prove that your late notice of a claim has substantially prejudiced its ability to investigate and defend against that claim; the point I want to make here is that when you’ve purchased an insurance policy, the last thing you want to do is litigate with your insurer to compel them to protect that policy.
To avoid that, comply with the policy language and, in this specific example, provide timely notice of claims to your insurer.
Now one final note on timely notice in a D&O policy. There are situations when an insured receives a demand letter and properly remits it to their insurer as a claim, and everything is fine.
Some time passes, and the insured ten receives a related lawsuit and says that between the first and second claims, the D&O policy has been renewed. It’s critically important that the second related suit or claim is reported again to the insurer; otherwise, the second related lawsuit may be precluded from coverage.
Have other questions, concerns, or comments on D&O insurance?
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