23 Mar 2012
The most common area of dispute in claims made under directors and officers liability (D&O) policies is notification. Most D&O policies allow for the notification of two separate events: ‘claims’ and ‘circumstances’. In order to ensure timely notification, it is essential that you are able to identify a claim or circumstance within the meaning of your policy.
Claim or circumstance?
A ‘claim’ is a defined term within the policy and is an event which will trigger the policy. Typically, policies require that claims be notified within a prescribed period of time and in a specific manner. As in many jurisdictions, a late notification could limit or prevent recovery under the policy, so it is crucial that directors, risk managers and legal departments understand what is considered a claim under their D&O policy. Examples of a claim include: receipt of proceedings, a written demand for relief alleging misconduct by a director, or commencement of a regulatory investigation implicating a director.
Most policies also allow notification of matters which could give rise to a claim at some point in the future. Your policy may describe this as a circumstance which is “expected to give rise to a claim” or as a circumstance that “may give rise to a claim”. A circumstance notification does not trigger the policy, but allows any later claim on the same facts to attach back to the policy year in which the circumstance was first notified to the insurer.
Timing of notifications
For claims, when the notification must occur will vary from policy to policy. Common requirements are that claims are notified “immediately” or “as soon as practicable”. Many have a ‘sunset clause’ allowing notification of a claim for a short period after the end of the policy period, typically 30 or 60 days for notification of claims that were made within the policy period.
To ensure prompt notification, your organisation may want to adopt best practices which require notification within seven days of receipt of a claim. For large organisations a strict deadline may not be realistic. In such cases it would be beneficial for the notification obligation in the policy to be triggered only upon the knowledge of the claim by key individuals within the organisation. This “responsible person” trigger will usually make the clock start running for notification upon the knowledge of the claim by the risk manager, general counsel or board member.
Circumstance notification provisions can differ greatly. Where a policy mandates circumstance notification, the provision will operate like the claim notification provision. However, permissive circumstance notification provisions may not include strict timescales around when a circumstance notification must occur. It is best practice to notify a circumstance as soon as you are aware of the potential for a claim, as this will prevent questions from insurers about timing of awareness and the effect of this on any renewal. Beware of notification provisions that operate as a condition precedent to coverage. The effect of such a provision can be that failure to make a notification within the specified time period is fatal to the entire insurance claim.
Drafting and submitting
Care should be given to any requirements explicitly stated in the policy wording about who should make the notification and what needs to be included. Directors should confirm that they have the ability to notify matters directly to their policy – some wordings permit only the policyholder to notify claims rather than individual directors. This can become problematic should a director find himself in need of a defence, but in conflict with the organisation.
Your insurance broker should have a team of claims specialists experienced in drafting notifications and negotiating the acceptance of notifications with insurers. Accordingly, directors should keep up-to-date on which insurance broker is advising the company and how to contact their claims team. Claim notifications should:
– be made in writing
– explicitly state that it is a notification
– identify the policy (by policy number and policy period) the claim is being lodged against
– include copies of the substantive documents making the claim, whether that is a writ, notice letter, subpoena or other documentation. In the case of subscription and layered programmes, notification should be sent to all insurers and layers.
You can avoid delay by also including details of the legal advisors a director wishes to appoint, including their charge out rates, a summary of the steps that are being taken to investigate the claim and the views of the insured and their advisors of the strengths and weaknesses of the claim and any available defences. If the organisation is going to indemnify the director this fact should be included as well.
Notification of circumstances can be more complicated, as a notification which is too narrowly drafted may not adequately capture the eventual claim, but a notification which is too broadly drafted may be rejected as not actually describing how the matter could give rise to a claim. Some circumstance reporting provisions include a long ‘laundry list’ of required information for a notification. Such lists should be avoided or modified if possible to prevent the rejection of a notification for failure to provide all the required detail. A circumstance notification should, however, include key facts as known at the time of notification, including as relevant:
– the potential claimant or category of claimants
– the potential defendants or category of defendants
– a description of the act or omission which the claimant may allege is wrongful or entitles them to relief
– the likely scale of the quantum of the potential claim
– any relevant documents.
Because of the significance of notification to policy performance, the ability to identify a claim or circumstance which may become a claim within the meaning of your D&O policy is a practical step every director can take to protect their interests in their D&O policy.
For more information visit Aon online at aon.co.uk