A policy’s conditions play an important role in determining the coverage that it provides. They cover a range of situations and circumstances. As a result, it is important that an organisation and its management be aware of the condition that apply and how they operate.
In this article, we will explore common conditions within the context of the following coverages:
- Directors and officers liability insurance
- Employment practices liability insurance
- Management liability insurance
- D&O insurance for nonprofits
You may also find that similar concepts apply to a broad range of financial lines insurances, such as professional indemnity insurance, cyber insurance, and even crime insurance to a certain extent. Keep in mind, however, that each policy is strictly interpreted according to its own terms and conditions.
Conditions: A definition
Conditions describe a specific premise upon which coverage depends. They represent an aspect of a policy that must be adhered to if an organisation and its management wish to remain protected by the insurance that has been purchased. A failure to pay attention to these details can be the difference between a successfully defended claim and financial ruin.
A policy will contain a section wholely dedicated to its conditions. This section will list all the conditions that apply and include a detailed description of each. These conditions interact with a policy’s insuring clauses, extensions, and exclusions to formulate its coverage. They play an important role throughout a policy’s lifecycle – from inception to expiry.
Conditions are not just limited to the clauses within the dedicated section. In a broader sense, they can also be thought of as the core concepts which comprise a policy’s terms – that is, the various relationships that exist between the schedule, wording, and endorsements. This is perhaps a more useful way of think about the conditions on which coverage rests.
A policy’s core operating conditions
The overarching principles of a policy are not conditions as such, but nevertheless play an important role in defining the scope of coverage.
Claims made policy
A claims made policy requires that a claim be made against an insured and be notified to the insurer during the policy period, for the resulting loss to be covered. For this reason, it is best to refer to such coverage as claims made and notified, to adequately account for the second condition of notification.
Prior acts coverage
The natural language of a claims made policy enables prior acts coverage. By prior acts, we mean any act or decision that has taken place at some time in the past, even before the commencement of the policy period. Insuring behaviour that occurred prior to the inception of coverage is a unique aspect of a claims made policy.
A retroactive date can be used to restrict a policy’s prior acts coverage. A retroactive date is typically listed on the policy schedule and attaches to a retroactive exclusion. A retroactive exclusion will typically state that no claim will be covered if it is a result of an act that occurred prior to the retroactive date.
Pending and prior litigation date
A policy may also include a pending and prior litigation date, which attaches to a pending and prior litigation exclusion. A pending or prior litigation date aims to exclude any claims that have commenced prior to the date specified. It is an insurer’s way of excluding claims and circumstances that should have been most appropriately notified in a previous policy period.
Geographical conditions to coverage
A policy will contain two types of geographical conditions to coverage. These will set the boundaries of where an organisation’s activities must take place and where liabilities must arise for any subsequent claim to be covered.
A jurisdictional limit refers to what country or region an insurer is willing to cover when a liability arises in that country or region. It focuses on the legal system in which a claim arises, rather than the location of the act that leads to the claim. For example, if an organisation is domiciled in Australia and is issued a letter of demand in Australia, the liability has arisen in the jurisdiction of Australia.
A territorial limit refers to where a wrongful act can take place and be covered as long as any subsequent liability arises in an insured jurisdiction. It focuses on the physical location of where an act occurs, rather than the jurisdiction of a claim. For example, if an organisation is domiciled in Australia, but is conducting business in the United States, it is operating in the territory of the United States.
A valid claim will need to satisfy both jurisdictional and territorial limits. Many policies provide worldwide territorial coverage but may restrict the jurisdictional coverage available for regions that are considered highly litigious, such as the United States, Canada, or those subject to trade sanctions.
Key conditions throughout a policy’s lifecycle
There are a number of conditions that an organisation and its management should be aware throughout the lifecycle of a policy.
Duty of disclosure
An organisation has a duty of disclosure to declare all material information about itself to an insurer. An insurer relies on this information to make a decision about whether to offer coverage – and if so on what terms. For this reason, it is important that the information is a true and accurate representation of the underlying risk – not only during the application process but also when making changes.
A policy is confidential in nature– not only with respect to its terms and conditions but also the existence of the policy itself. As a result, it is essential that an organisation and its management do not disclose any information about its coverage. This aims to preserve the knowledge of this sensitive insurance to those who will rely on it in times of difficulty, and minimise opportunistic claims.
Change in control
If an organisation undergoes a change in control during the policy period it will result in a conversion of coverage. When this occurs, a policy will no longer cover an organisation and its management for forward-going acts. Rather, only acts that occurred prior to the change in control will be covered. This phenomenon is broadly described as coverage being in run off, and requires consideration of an extended reporting period.
Conditions affecting the claims process
There are a number of policy conditions that govern how claims are handled. This is especially important because the claims process requires careful management to ensure both the insured receives adequate coverage and the insurer has fair oversight of the process.
A policy will set out clear conditions for any claim notification. By following these protocols, an organisation and its management can adequately notify an insurer of any claim or circumstance arising in the policy period.
Claim notification conditions often include:
- What constitues a claim
- The claim notification process
- How defence counsel is appointed, and the role of panel counsel
- That nature of an insured’s cooperation
- Why an insurer may issue a reservation of rights letter
- What are the consequences of a late notification
Understanding these conditions is essential to having valid claims covered as expected. A failure to follow these procedures can potentially jeopardise coverage, and in a worst-case scenario, result in an insurer declining coverage altogether.
Duty to defend
Who has the duty to defend an underlying claim – the insurer or the insured – is an important aspect of the claims process. Once a claim has been notified to an insurer, a legal defence will need to be prepared. In any case, an insured will need to cooperate with their insurer, however, the duty to defend language of a policy will influence which party oversees the defence strategy.
A policy will also set out clear conditions for claim settlement. Claim settlement is important because these rules govern what a policy will pay for and who is the beneficiary of such coverage. Insurance does not intend to cover all things, and these conditions will lay out clear rules of how costs will be handled.
Claim settlement conditions often include:
- How to obtain a consent to settlement
- How an insurer can affect a hammer clause
- Why cost allocation may occur
- How and when an insurer will seek Cooperation
- The benefits of seeking subrogation
- order of payments and order of recoveries
By adhering to the claim settlement conditions of a policy an organisation and its managers will be able to seek fair reimbursement for any covered costs. It will also highlight any shortfalls in coverage, so uncovered portions of settlement can be adequately highlighted and budgeted for.
Conditions of interpretation and dispute resolution
During the normal course of a claim, it is not unusual for an insurer and insured to disagree on the interpretation of a policy. Most policies are long and complicated documents, that require some special knowledge to be able to read and interpret coverage. And even if a policy can be easily interpreted, there are many ways in which a claim can come about.
A policy interpretation clause is likely to be included within the terms and conditions. This clause aims to clarify which jurisdiction will apply when such a disagreement occurs. In most cases, because it is the insurer that drafts the wording, it will be the jurisdiction in which the insurer is domiciled. That way, should an issue arise, the next steps are clear.
While in the event of a dispute between an insurer and insurer, this will often be through negotiation or dispute resolution. In the event that a dispute cannot be resolved through other terms, it is clear how the subsequent legal process will be administered. That way, should there be any dispute relating to the interpretation of coverage, those interested understand the laws that will apply.
Conditions: An example
Now that we have explored common conditions and their influencing factors, we can tie it all together.
An organisation purchases an insurance policy to protect its management from board of directors liability. The policy period is twelve months, from 30 September this year to 30 September next year. The territorial limits of the policy are worldwide, and its jurisdictional limits are worldwide excluding the United States and Canada.
The organisation operates in the defence industry. Domiciled in the United Kingdom, it has established a subsidiary in Australia – whereby it consults to a government contractor (a third party) on the development of new technology. The contractor discovers the organisation is also consulting to a competitor in the United States, and brings a claim against the directors of the Australian subsidiary.
The claim is notified to the insurer. The activities are noted as being conducted within the territories of Australia, the United Kingdom, and the United States. The claim has arisen in the jurisdiction of Australia. These particulars satisfy the geographical limits of the policy, so panel counsel are appointed to defend the claim. Legal costs are incurred and the claim is eventually settled.
A policy’s conditions play an important role in determining the coverage that it provides. Conditions are located within a dedicated section of a policy, but are also inherent throughout its schedule, wording and endorsements. It is important to be aware of them more generally, but also be able to review and interpret the details on each on its merits.