Improving the scope of a policy with coverage extensions

A D&O policy’s insuring agreements, along with its coverage extensions, make up the total protection available to a policyholder. Below we outline the most common extensions found in the market.

Coverage extensions provide an organisation with protection in addition to what is offered by a D&O policy’s insuring agreements. They exist because insuring agreements, despite their broad construction, cannot always address all management exposures adequately. Extensions attempt to bridge this gap, providing coverage for situations which would otherwise not be enough to trigger a policy to respond.

In addition to their practical nature, extensions are offered by insurers to strengthen their product offering. They are created to solve a wide range of problems and are continually being improved to address the changing landscape of D&O liability. While many extensions are considered standard, others may be tailored to the needs of the policyholder. Outlined below are some of the most common coverage extensions in found in the market.

Advancement of defence costs

The advancement of defence costs extension compels an insurer to forward defence costs to an insured as they are incurred throughout a claim. Most commonly, it requires an insurer to settle an insured’s legal expenses within a defined period of time.

Without this extension, an organisation or its executives may be required to fund their own defence costs until an insurer can assess their claim and reimburse them at a later date, which may take some time. Most policyholders consider this coverage to be essential, as legal costs can be expensive and not everyone has the resources to pay for these services up-front.

Importantly, however, if it is eventually determined that a claim is not covered – i.e. because it is explicitly excluded by the policy – any defence costs that have been advanced by the insurer must be repaid.

Retired directors and officers

According to the claims-made and notified provisions of D&O, an organisation must have an active policy at the time a claim is received for it to be covered. As some incidents may take many years to materialise into a form that resembles a claim, if a policy is not renewed, an organisation’s retired directors and officers can be left unexpectedly exposed.

This is a relevant concern for retired executives, as once they have departed an organisation they have no control of its ongoing insurance programme. Therefore, they cannot guarantee that their former organisation will continue to purchase the insurance, which is required for their future well-being.

As a solution, insurers often agree to automatically protect retired directors and officers for a defined period of time, by providing them with an extended reporting period. An extended reporting period allows retired executives to report claims to an insurer after their departure, even if the organisation that they served no longer carries an active policy.

Outside directorship

Many insurers extend the coverage of a policy to protect directors and officers while they participate on the boards of external non-profit organisations. This coverage enhancement has evolved out of the common practice of experienced managers occupying non-profit leadership positions pro bono.

Provided that both the insurer and the insured organisation agree, outside directorship coverage protects managers over and above the indemnification and insurance protections carried by the non-profit itself. This provides executives with the comfort of knowing that they will remain protected in the event that their non-profit’s insurances are insufficient or completely exhausted.

This provides executives with the comfort of knowing that they will remain protected in the event that their non-profit’s insurances are insufficient or completely exhausted.

New subsidiaries

The new subsidiaries extension automatically covers any new subsidiaries acquired by an insured organisation during the period of insurance. This extension ensures that any new subsidiaries receive the same protection as their parent organisation, providing essential coverage to the directors and officers of these acquired operations.

For new subsidiaries seeking protection under this extension, it’s important to note that coverage commences from the date of acquisition, and only covers acts that are committed after this date.

Additionally, the automatic coverage provided is usually subject to the relative size of the acquired entity. Subsidiaries exceeding 10-20% of the parent organisation’s value will typically require approval by endorsement.

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Spouses, heirs & legal representatives

When confronted with an impending claim, some directors and officers may consider transferring ownership of their assets to a friendly third party, such as a husband, wife or legal guardian.

In doing this, their assets can be placed out of reach from a claimant’s demands. And while in some cases this may be a sensible legal strategy, it may also result in a friendly party being implicated in the same claim.

The spouses, heirs & representatives extension ensures that any related party who may be dragged into a claim, due to their ownership or control of an executive’s assets, is protected. The cover provided by this extension is generally very handy, but its scope is limited; as it will protect them from the consequences of an executive’s actions, but not their own.

Continuity of coverage

Continuity of coverage allows a claim notification to be accepted late, as long as the policyholder has held uninterrupted D&O coverage over a period of time. Continuity of cover is generally available to organisations with existing D&O coverage and it creates a strong incentive for an organisation to remain loyal to its insurer each renewal.

A late notification is a claim notification which should have been made in a previous policy period but wasn’t. Perhaps an organisation didn’t think that a particular circumstance warranted notification at the time, or maybe the notification failed to occur by mistake. Whichever the case, the continuity of cover extension allows a policyholder to successfully lodge a late notification with an insurer, which would otherwise be declined on this basis.

Whichever the case, the continuity of cover extension allows a policyholder to successfully lodge a late notification with an insurer, which would otherwise be declined on this basis.

For example, consider an organisation that has renewed its D&O policy for another year, but realises that it failed to notify its insurer of a claim (or circumstance which could lead to a claim) in the previous policy period. If it has renewed its coverage with the holding insurer, and the policy contains a continuous coverage benefit, the late notification may be accepted.

Now, instead of this circumstance being excluded due to its late notification, as the current policy excludes known claims and circumstances, the insurer may accept the notification provided the claim has not been prejudiced as a result.

Important! While continuity of coverage is a nice benefit to have, it shouldn’t be relied on as a substitute for prompt claims notification.

Other common extensions

While not as frequent as those listed above, the following extensions may also be available to policyholders:

• Civil or bail bonds: The cost of funding civil or bail bonds, allowing a director or officer to be released from prison.
• Public relations expenses: The cost of engaging a public relations firm to mitigate reputational damage to an executive or organisation.
• Extended reporting period: A designated time period after the expiration of a policy, whereby claim notifications will be accepted by an insurer.
• Deprivation of assets: Where an executive has their assets confiscated or frozen, an insurer will provide necessary payments for schools, housing, utilities and personal insurance services.
• Extradition costs: The defence costs associated with opposing an extradition proceeding, including any bail process and subsequent trial.
• Joint ventures: Coverage for claims arising from joint venture operations.

Conclusion

Coverage extensions provide an organisation and its management with a greater level of protection, over and above a policy’s insuring agreements. They are considered to be the ‘bells and whistles’ of D&O, and ensure that a policy will respond to circumstances and situations which would otherwise not be enough to trigger coverage.