Reporting claims and circumstances to insurers

We all buy insurance hoping we’ll never need to use it. However, there will come a time where you’ll have to notify your D&O insurer of a claim, or at least, a situation which may materialise into one. Below, we explore the things you need to know.

One of the most important concepts of D&O surrounds the notification of claims. D&O provides coverage on a claims-made and notified basis, which requires that a policyholder notifies its insurer at first knowledge of a claim or circumstance that may lead to a claim, for that incident to be covered.

Notification

In a practical sense, D&O policies require claims and circumstances to be notified to an insurer as soon as practical. This requirement is complicated by the fact that policies require a claim or circumstance to be notified in the same period of insurance, in which management first became aware of the incident, for that claim to be covered.

Important! If an executive believes that a certain action or event is likely to materialise into a claim sometime in the future, they should notify their insurer immediately. As long as this is done, an insurer is obligated to cover the incident, even if it doesn’t mature into fully-fledged claim until after the policy has expired.

Late and delayed notifications

Insurers may provide some leeway and allow for a claim notification to be accepted beyond the period of insurance in which it should have been notified. This may occur in situations where an organisation’s D&O policy has an extended reporting period or other benefit permitting late notification, such as continuous coverage.

Consequences of failing to notify

Failing to promptly notify an insurer of a claim or circumstance can affect coverage, even if an insurer has not been prejudiced by the delay. If a notification is made late and there is no provision for late notifications, any subsequent claim may be declined.

Alternatively, if late notifications are permitted, but it is not made within a reasonable timeframe, an insurer may argue that its rights have been prejudiced and attempt to reduce its liability or deny acceptance of the claim on that basis.

Important! Since the notification of claims and circumstances is solely within the control of those insured by a policy, it is their obligation to ensure that it is done so in a timely manner.

What constitutes a claim?

Now that we understand how a claim should be correctly notified, what exactly is a claim or circumstance? While the definition varies from policy to policy, it generally includes any written demand, writ, summons or other legal proceeding made against the policyholder.

Some policies may even consider a verbal allegation of wrongful behaviour, enough to warrant a notification. To be sure, directors and officers should refer to their policy’s wording, for the definition applicable to their situation.

For more information on the definition of a claim, you might like to take a look at this post.

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Non-duty to defend

As opposed to many general liability and professional indemnity policies, D&O insurance does not generally impose a duty on the insurer to defend the underlying claim against an insured.

Instead, a policy binds an insurer to indemnify an insured; that is, pay the financial losses incurred by – or pay on behalf of – a policyholder defending a claim. This arrangement is commonly known as a non-duty to defend provision and is found in many stand-alone D&O policies.

Having a policy with non-duty to defend provisions means that it is the insured’s responsibility, and not the insurers, to obtain assistance from legal counsel. However, as an insurer also has a financial interest in reaching a successful outcome, the policyholder is required to obtain its consent before proceeding with their selected defence.

Did you know? As small and medium enterprises are often considered less sophisticated in respect to their risk management practices, many management liability policies impose a duty on the insurer to defend the underlying claim against an insured. This means that it becomes an insurer’s responsibility to appoint lawyers and arrange a defence for those insured.

An economical solution for all

As legal expenses contribute to the cost of a claim and also erode the limit of liability, both the insurer and policyholder require claims to be defended in an efficient and cost-effective manner.

This often leads insurers to allow an insured to proceed with their preferred defence counsel, provided they have a clear grasp of the issues at hand. This being said, if there is any dispute over the fees or qualifications of the counsel selected, an insurer may insist the use of its panel lawyers.

Important! To minimise the chances of disputes when appointing legal counsel, policyholders should notify an insurer of their intentions as early as possible.

Cooperation

Once a claim is underway, an insured has an obligation to cooperate with their insurer. The cooperation clause exists to ensure that a policyholder takes steps to support the defence of a claim, and refrains from interfering with it.

A policy may not explicitly state what constitutes cooperation, however, it is expected that directors and officers provide all information and assistance requested by the insurer, and assist in mitigating further losses where possible. This usually entails being forthcoming with key documents and ensuring that proper disclosure is made regarding the ongoing matters of a claim.

The benefits of transparency

From a policyholder’s perspective, cooperation is the best way to ensure a smooth claims resolution. It allows an insurer to quickly and accurately assess the potential liability of a claim and take proactive steps to help an insured settle it before losses begin to mount.

If an insured fails to cooperate, it can be a source of friction and may contribute to an insurer being tardy in fulfilling its payment obligations. In cases of serious non-cooperation by an insured, an insurer may even be released from its obligations under the policy.

Consent to settlement

An insurer will typically insist on being proactively involved in a claim’s proceedings. In addition to the financing they provide, insurers play a key role in working with an insured and their legal counsel to devise an effective defence and settlement strategy.

Additionally, it’s important to note that a policyholder must first obtain their insurers agreement before a claim can be settled. If there are multiple insurers involved, as is often the case with large D&O programmes, all interested insurers are required to sign off their approval, before settlement can be finalised.

Consequences of obstruction

If a policyholder fails to keep an insurer informed of a claim’s progress, this may lead to issues with gaining settlement authority. For example, if an insurer is informed of a significant increase in a claim’s quantum at the last minute, there may be delays in arranging settlement while the necessary authority is sought.

Who’s involved in the claims process?

When a director or officer is involved in a claim, they often encounter a range of insurance professionals. An insurance broker represents the policyholder’s interest and attempts to guide them through the claims process. They will also have a lawyer, either appointed by themselves or the insurer, to defend the claim on their behalf. Finally, a claims officer represents the interests of the insurer, assessing the claim and interpreting policy coverage.

The hammer clause

In much the same way that an insured must obtain an insurers approval to settle a claim, an insurer must also seek the permission of an insured. However, if an insurer believes that a settlement is in the best interests of both parties, and the insured does not approve the recommended course of action, the insurer may invoke a protective clause referred to as the hammer clause.

By enacting the hammer clause, an insurer limits its liability to the amount that the claim could have been settled for, plus defence costs incurred to the date of the proposed settlement. If a claim ends up costing more than the recommended settlement value, the insurer will not bear any part of the additional cost.

Subrogation

Whenever a D&O insurer indemnifies a policyholder from a covered claim, they automatically inherit the right to subrogate against others. Subrogation permits an insurer to assume the rights of the insured and to recover damages from any party who may be ultimately responsible for causing a loss.

An example of where subrogation may apply is when management relies on inaccurate advice provided by a third party. If this information is used as the basis of an action, which is later proved to be wrongful, and an insurer incurs losses defending the executives involved, the insurer may attempt to recoup its losses from the third party.

Conclusion

Knowing how to correctly report claims and circumstances to an insurer is imperative to the effectiveness of a D&O policy. There are many factors to be considered, however, ultimately it will be the terms of your specific policy and your underwriter relationships that will eventually determine the right process for you.