Claims and Circumstances – Notify early and Notify often

Our first article in this series dealt with who is covered under a D&O insurance policy, the types of losses that are covered and how the policy operates. In this article, we focus on what directors and officers and the company should do in the event that they receive a claim or become aware of circumstances which may later lead to a claim to ensure that an entitlement to cover is properly triggered.

Have I received a claim?

For the most part, a ‘claim’ can be readily recognised.  However, because D&O insurance policies distinguish between claims and circumstances which might later lead to a claim, it is useful to recap what amounts to a claim under the policy definitions.

A ‘claim’ is usually defined under a policy to mean a written demand for compensation or an assertion of liability and the commencement of civil, criminal, administrative or regulatory legal proceedings against an insured person or the company for a wrongful act committed by the insured person in his or her insured capacity.

What are ‘circumstances’ and why are they important?

When an insured person or company receives a claim, in order to trigger an entitlement to cover, the claim must be notified to the insurer during the policy period or any extended reporting period.  In addition, D&O policies may also permit or require insured persons and the company to notify any circumstance reasonably expected to give rise to a claim.

Often, situations arise which fall short of being a ‘claim’ but give cause for concern that a claim may later develop.  This can be because the directors and officers are aware of an error, a loss or dissatisfaction involving a party who may later become a claimant although no formal action has been taken against the directors and officers or against the company.

If the directors and officers or the company become aware of circumstances that might give rise to a claim, it is vital that the insurer be notified as soon as reasonably practicable, and in any event, before the end of the existing policy period.  By doing so, the directors and officers will be entitled to seek cover under that policy for any claim that subsequently emerges, even if that occurs after the expiry of the policy.  This is so either because the policy contains a deeming clause under which the claim is deemed to have been made during the policy period that the circumstances were notified.

Alternatively, if the Insurance Contracts Act 1984 (Cth) (ICA) applies to the policy, notifying the insurer of circumstances triggers section 40 of the ICA that will have the same effect.

If there is no deeming clause in the policy, no notification of circumstances as soon as reasonably practicable and a claim subsequently emerges, the directors and officers and the company will not be entitled to cover.

The benefits of continuous cover

These issues can be alleviated where there is continuity of cover with the same insurer over consecutive policy periods and the policy contains a continuous cover clause.  The continuous cover clause will allow the directors and officers to obtain cover for any claim arising out of a circumstance that was known in a prior policy period but was not notified.

However, this will not be available unless the D&O policy has been maintained without interruption, the claim and known circumstance has not been notified to another insurer and the cover available will be on the terms applying during the policy period when the directors and officers became aware of the circumstance.

For the same reasons, particular care must be taken when making a decision to change insurers.  If this occurs, the benefits of continuous cover will be lost.  A claim resulting from circumstances that were not notified in an earlier year will not be covered by the insurer in a subsequent year because they will be ‘prior known circumstances’ for which cover is usually excluded.  This is a class of insurance where the temptation of securing a lower premium must be balanced against the risks of not securing cover for a claim from either insurer.