Extensions provide an organisation and its management with additional coverage over and above a policy’s insuring clauses. They provide a flexible method of updating coverage to address new managerial-related risks and are often used by an insurer to differentiate its product offering from that of its competitors.
In this article, we will explore common extensions 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.
Extensions: A definition
Extensions provide an organisation and its management with protection over and above a policy’s insuring clauses. They exist because, despite the broad coverage of insuring clauses, it is not possible for them to include all the protection required. Extensions aim to bridge this gap by covering situations that would otherwise not be sufficient to trigger a policy’s response.
In addition to their practical nature, extensions are included by an insurer to strengthen its product offering. They are developed to solve a wide range of problems and are continually being revised to address the changing landscape of managerial-related risks. If an insurer is going to offer “bells and whistles” as part of a policy, these will often be implemented as extensions.
Extensions work together with a policy’s insuring clauses, key term definitions, exclusions, and conditions, to construct its overall coverage. They can operate independently, or in conjunction with other sections of a policy. For example, if an exclusion is used to address a particular hazard, an extension can be used to write-back certain aspects of coverage, such as defence costs.
Advancement of defence costs
Advancement of defence costs compels an insurer to pay for an insured’s defence costs as they are incurred throughout a claim, even if an insurer is yet to arrive at its coverage position. Such an extension requires an insurer to settle an invoice in a defined period of time, typically within thirty to sixty days of its receipt.
Without this coverage, an insured would be required to fund their own defence costs until an insurer could evaluate their loss, determine its validity, and arrange for reimbursement at a later date. This process can be time-consuming, and legal costs can accumulate quickly. The reality is that many organisations would have difficulty funding these costs in the short term.
The advancement of defence costs is conditional on a claim being eventually covered. If at a later date a claim is declined, or part of its claim settlement is subject to cost allocation, an insured will be required to repay any costs advanced. And despite what the end result may be, an insured is obliged to cooperate with an insurer throughout this process.
Retired directors and officers coverage
Retired directors and officers coverage protects individuals for a specific length of time, typically seven years, following their retirement from an organisation. It acts as a form of automatic run off insurance, to ensure that individuals remain protected from any claims that may arise against them in the future, as a result of any wrongful act that occurred prior to their departure.
This type of coverage is a unique feature of a claims made policy, which requires that a claim be made against an insured and be notified to the insurer during the policy period, for any resulting loss to be covered. It aims to address the concerns of retiring individuals, whose coverage would otherwise depend on an organisation continuing to purchase a policy.
Retired and directors and officers coverage allows individuals to make a claim notification to an insurer, even if an organisation no longer purchases insurance coverage on their behalf. This can provide management with peace of mind that they will remain protected, should they retire from their role during a policy period.
Outside directorship coverage
Outside directorship coverage protects the management of an organisation when they also participate in the management of an external nonprofit organisation. This coverage enhancement has evolved out of the common practice of experienced individuals occupying positions of leadership in nonprofit and community-based initiatives, often as volunteers.
When individuals engage in this practice, they are required to satisfy the directors duties of these external roles. Outside directorship coverage aims to provide individuals with an additional layer of protection, over and above any directors indemnification agreement and D&O insurance for nonprofits carried by a nonprofit organisation itself.
Should a nonprofit’s protection mechanisms become exhausted, individuals may be covered by a policy on the condition that an organisation is aware of the outside directorship and that it consents to indemnify such a matter. An insurer may also consider expanding this coverage to include for-profit outside directorships, upon request.
New and acquired subsidiaries coverage
New and acquired subsidiaries coverage protects any subsidiary created or acquired by an organisation during a policy period. This extension ensures that any subsidiary receives the same protection as its parent, providing automatic forward-looking coverage from the date of creation or acquisition – with this date also effectively acting as a quasi retroactive date.
The automatic coverage for a new or acquired subsidiary is often conditional on the relative size and complexity of an entity. Any subsidiary exceeding 10-20% of the parent’s total revenue or assets, or with exposure to high-risk jurisdictions such as the United States and Canada, will generally need to be agreed by an insurer separately and included by endorsement.
The coverage for new and acquired subsidiaries often aligns closely with cessation of subsidiaries coverage, which maintains prior acts coverage for any subsidiary that is wound up or divested during a policy period. As a claims made policy, this coverage is dependent on an organisation continuing to purchase a current policy into the future.
Estates, heirs, and legal representatives coverage
Estates, heirs, and legal representatives coverage protects any legal representative of an insured in the event they are drawn into a covered claim, but only with respect to the insured’s actions, not their own. This benefit also typically extends to include any spouse of an insured, as they are often indirectly exposed to such claims.
When confronted with impending litigation, some individuals consider transferring ownership of their assets to a trusted third party, such as a husband, wife, or legal guardian. By doing so, their assets may be placed out of reach from a claimant’s demands. While this may be a sensible legal strategy, it can also result in a trusted party being implicated in the matter.
Estates, heirs, and legal representatives coverage ensures that any related party who may be dragged into a claim, due to their ownership or control of an insured individual’s assets, is protected. The cover provided by this extension is helpful, but importantly, its scope is limited. It will protect them from the consequences of an insured’s actions, but not their own.
Continuity of coverage
Continuity of coverage allows a claim notification that should have been notified in a prior policy period, to be accepted late, as long as an organisation has held continuous, uninterrupted coverage with the same insurer over time. This benefit is generally included automatically and creates a strong incentive for an organisation to remain loyal to an insurer.
A late notification is one that should have been made in a previous policy period, but for some reason wasn’t. Perhaps something was overlooked, or perhaps it was mistakenly believed that a claim notification was not warranted. In any case, an insurer may be forgiving as long as the late notification was not deliberate and that a duty of disclosure has been satisfied over this time.
Continuity of coverage is often related directly to a continuity date or pending and prior litigation date, listed on a policy schedule. While continuity of coverage is important, it shouldn’t be relied on as a substitute for a prudent claim notification process. If an insurer determines that its position has been prejudiced, there can be serious implications.
Other common extensions
There are a range of common extensions that can assist management while defending a covered claim, and also some that will operate on their own accord.
Bail bond expenses
Bail bond expenses covers the reasonable cost of a bail bondsman or other similar service. This extension is not likely to cover the cost of the bond, just the bond service provider.
Public relations expenses
Public relations expenses covers the reasonable costs of engaging a communications consultant to mitigate the negative effects of publicity.
Deprivation of assets
Deprivation of asset expenses includes an allowance for certain personal expenses when individuals are deprived of access to their personal assets. Common expenses include schooling, housing, utilities, and personal insurance.
Extradition expenses include the reasonable costs of preparing a defence for an extradition proceeding, bail bond process, and subsequent trial. It may also include the costs of seeking expert advice from a crisis counsellor and accountant.
Court attendance expenses
Court attendance expenses usually consist of a daily fee paid to individuals, when they are required to appear before a court of law or other formal hearing.
A discovery period may be made available to an organisation in the event that it does not intend to replace an expiring policy. This will typically consist of either an automatic discovery period or a paid discovery period.
How do extensions interact with other policy sections?
Discussing what is covered by extensions can be tricky because every policy is slightly different, not only with respect to what is covered but how it is covered. Many policies share a similar format, including insuring clauses, extensions, exclusions, and conditions. However, the way in which coverage is constructed will vary from one insurer to the next.
Many aspects of what a policy covers will be captured by the definition of loss, i.e. what types of loss an insurer will pay for as a result of a covered claim. Often this definition will be quite broad to cover much of what is expected, such as defence costs etc. If an insurer would like to expand its coverage further, this will often be done with extensions, conditions, and endorsements.
The key to understanding a policy’s coverage is to keep an open mind as to how its protection can be crafted. In one policy, a particular coverage will be over here, while in another it will be over there. A policy will need to be interpreted on its own merits. There are few shortcuts, however, a general overview of what to expect can certainly be helpful.
Extensions: An example
Now that we have explored common extensions and the various factors that influence coverage, 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 31 December last year to 31 December this year. The policy includes a retired directors and officers coverage extension, providing seven years of automatic run off insurance to individuals post-retirement.
The organisation operates in the shipping industry. During the policy period, a director decides to retire after a long career. At the end of the policy period, the organisation decides not to replace its expiring policy and does not proceed with a discovery period. Two years later, the retired director receives notice of a pending claim, alleging a breach in duties during his final year of employment.
The director speaks with his broker, who in turn makes a claim notification to the insurer who was on-risk during the policy period in which he retired. The organisation cannot be contacted (for indemnification), and the notification is subsequently accepted by the insurer under the relevant extension. Legal counsel is appointed and defence costs are incurred in the amount of $50,000.
Extensions provide an organisation and its management with additional coverage over and above a policy’s insuring clauses. They are often used by an insurer to differentiate its product offering from that of its competitors and provide a flexible method of updating coverage to address new managerial-related risks.