Insolvency, Nonrenewal, and Claims: Strategies for Post-Policy Period Coverage under Claims-Made Policies
Clients often call when a claims-made liability insurer does not intend to renew an expiring policy. Usually, the call is about directors and officers (D&O) liability insurance, but it might also be about fiduciary, employment practices, or professional liability insurance. An insurer may choose to non-renew for various reasons. The most frequent and troublesome reason is that the business/insured is financially distressed and contemplating or in bankruptcy. Given the business/insured’s inability to fulfill its obligations, the risk of litigation is heightened. Moreover, directors and officers are potential targets. Their personal assets will not be protected by a corporate bankruptcy, and the bankruptcy ultimately may provide a willing plaintiff a procedural path to litigation. At the same time, Claims may not be asserted until after the insurer non-renews and the Policy Period has expired. While a claims-made policy ordinarily will not afford coverage for Claims asserted after expiration of the Policy Period, we offer the following strategies to preserve the possibility of coverage for post-expiration Claims.
1. Give notice of any “Claims.”
In the claims-made liability insurance context, the “Claim” is the matter asserted against the business/insured. Demand letters, arbitration demands, and lawsuits are examples. Claims-made liability insurance policies obligate the insured to report any Claim within a certain period, for example, “as soon as practicable and in any event within 60 days of the end of the Policy Period.” An insured that fails to report a Claim in a timely manner may forfeit coverage for that Claim and any subsequent related Claims. But, on the bright side, a timely-reported Claim also preserves the possibility of coverage for subsequent “related Claims” (sometimes referred to as Claims based on “Interrelated Wrongful Acts”) made any time in the future.
2. Give “Notice of Circumstances.”
Most claims-made policies provide the option to give a Notice of Circumstances that may give rise to a future Claim (sometimes also called “Notice of Potential Claims”). So long as the Notice of Circumstances is provided before the Policy Period expires, then any future Claim arising out of the reported circumstances is eligible for coverage. Policy language differs on the requirements for Notice of Circumstances. Generally speaking, giving Notice of Circumstances may entail describing (i) the circumstances on which the future Claim may be based, (ii) the identity of the potential future claimants, (iii) the nature of the anticipated damages, and (iv) the identity of the potential claimants.
3. Purchase “Tail” Coverage.
Many claims-made policies give the insured an option to purchase “tail” (or “run-off”) coverage. Tail coverage applies to Claims made against the insured during the tail period (sometimes called an “extended reporting period” or “discovery period”) that are based on alleged Wrongful Acts occurring before the end of the Policy Period. Claims asserted during the tail period implicate the coverage limit remaining under the non-renewed policy, whether that limit is pristine or impaired. Insurers typically offer tail coverage in one, two, three, and six-year increments, beginning at the end of the Policy Period. Insurers charge an additional premium for tail coverage, and the longer the period, the higher the premium. Most policies require insureds to purchase tail coverage before, or within a short period after, the end of the Policy Period.
Ideally, a policy will obligate the insurer to provide tail coverage, will give multiple options of tail period lengths, and will pre-price those options. If the policy doesn’t obligate the insurer to offer a tail coverage option, the insurer may not offer it. If the policy only obligates the insurer to offer a one-year tail period option, the insurer may not offer longer tail period options. And if the policy doesn’t pre-price the tail period option(s), the insurer may charge a prohibitive premium.
4. Optimizing the Possibility of Coverage Involves all Three Strategies
Optimizing the possibility of coverage requires a business to give notice of Claims, to give Notice of Circumstances, and to purchase tail coverage. Giving Notice of Circumstances is a no-cost option, and coverage extended by Notice of Circumstances does not expire. When a Notice of Circumstances is due, however, the circumstances that ultimately give rise to a Claim are often unknown, and it can be difficult to predict which known circumstances will result in a future Claim. Despite their best efforts in giving what is seemingly a comprehensive Notice of Circumstances, insureds often fail to give notice of the particular circumstances that ultimately give rise to a Claim. In comparison to a Notice of Circumstances, tail coverage does not require the insured to know, guess correctly, and disclose in advance the circumstances that will give rise to a future Claim. But tail coverage requires a premium payment and expires at the end of the tail period.