Today we continue our “Five Things You Need To Know About D&O Insurance” series with part two, Notice. In this series we address various kinds of insurance policies and highlight the five most important issues faced by corporate policyholders under each of the various kinds of insurance policies. Far too many corporate insurance claims have been invalidated by courts, for reasons that are entirely preventable, and one of the most common reasons for forfeiture of coverage is notice under claims-made insurance policies. See Fatal Traps In D&O Insurance Policies, Another Policyholder Falls Victim To Late Notice Trap. Insurance carriers have placed notice front and center, and, if anything, are expanding their efforts to deny claims based on late notice.
The task of providing notice is not as simple and easy as it once was. Notice and interrelated wrongful acts provisions contained in claims-made insurance policies have become increasingly more complex and one sided over the years, turning the task of providing notice from a simple effort, into one of the trickiest insurance tasks organizations face. Moreover, with claims-made insurance policies, many courts have rejected established notice prejudice standards in favor of inflexible rules favoring coverage denials. In addition, determining when to provide notice is more difficult than ever before. Modern D&O insurance policy wording has turned the old adage of not worrying about notice until a lawsuit has been filed into a risky proposition. Many a corporate policyholder has followed the simple rule of tendering a lawsuit to their insurer only after they were sued, only to find that coverage was forfeited because the insurance carrier asserted that the lawsuit was not the claim. Rather, an earlier letter, an earlier letter from a disgruntled customer or shareholder, for example, was the claim, and, because notice for that earlier letter was not provided during the notice period set forth in the policy, coverage is forfeited.
This is just one of many examples of how the rules of notice do not always follow common sense business practices.
The timing of notice can also raise important strategic issues, and afford multiple options. Several kinds of notice are generally afforded under the policies. First is notice of a claim. D&O policies typically provide specific time periods in which a claim must be tendered to the insurer. At a minimum, policyholders need to understand the definition of claim, so as not to inadvertently omit providing notice. Second is notice of facts or circumstances that could give rise to a claim. Notice under this kind of provision is generally optional. It affords policyholders the option of deciding what policy period will provide coverage. If notice of facts in circumstances that might give rise to a claim is properly given one year, for example, and a claim is not made until six years later, coverage will be provided under the policy in which the initial notice was provided. Deciding when and how to provide this kind of notice is a strategic legal decision that should not be made without a full understanding of the implications and options afforded under the policy.
It is also not uncommon to overlook key language that should be contained in notice letters. For example, if the policy provides that the policyholder may not incur defense costs without the express written permission of the insurance carrier, the notice letter should identify defense counsel and request consent to incur defense costs. Although this appears to be a ridiculous formality, insurance carriers commonly argue that they are not required to pay defense costs prior to their agreement to pay, unless this key language is contained in the notice letter.
Notice issues are often much more nuanced than they at first appear. As a general rule, the latest that policyholders should think about notice is when they retain outside counsel to defend them in a lawsuit, claim, or investigation. This, however, may be too late if earlier demands have been made or subpoenas have been issued. If defense counsel of any kind has been hired, and legal counsel has not yet reviewed and considered notice options, policyholders are at risk of forfeiting coverage.
If our organization received a governmental request, demand letter, subpoena, or lawsuit, and the organization is facing the potential for significant loss or expense, it makes sense to have competent insurance recovery counsel evaluate your notice options. Otherwise, policyholders will continue to unnecessarily compromise their otherwise covered claims.
If your organization is facing any of these issues, please give us a call. We would be happy to work with you to determine best steps to take going forward.
Next week we continue our series with the third issue, Claim Denials.
We have included the transcript of this video below.
Five Things You Need To Know About D&O Insurance : 2) Notice
Point number two, notice is complicated. Now, to get coverage under a D&O insurance policy, you are going to have to give notice, what does that mean? Well, you are going to have to tell the insurance company that you have a claim or you have something and you want then to respond. Over first issue is, well, what do I give them? What do I tender to the insurance company? Well, you can tender lawsuit.
Most folks know, if you have a lawsuit you send it to your insurance company and then that forces them to respond because they have an actual lawsuit. Now, what happens if you get a letter from someone that says, “We don’t like the way you are behaving?” What happens if you get a subpoena from a governmental agency? What happens if you get an email saying, “Hey, I don’t like the way my investments performed and I would like to check into it a little bit more, please send me the following.”
All those types of things are issues, they might be claims, they might not be claims but my point is you have to look at the insurance policy, the D&O insurance policy and determine whether those are claims. Now what if you have a claim? What if you don’t have a claim? So, a lawsuit would be a claim, but that’s pretty simple. A subpoena would likely be a claim as well. But things below that, what if you have just a letter, what do you do with that? Do I do anything with that? Do I care?
Well, the answer is yeah, you do care. The reason you care is because the 2nd issue on the notice is, the question is, how do I tender what I have? There is at least two different ways you can do it. One is you can tender it as a claim, if you tender it as a claim the insurance company has to step up, take the action, pay for the defense and defense and/or defend you at action.
So, if you have a lawsuit you would tender it that way. Now what if you don’t have a lawsuit? Well, you might have a demand letter, you might have something that is not even a demand letter but you have a couple of those things and you are worried. You are thinking, well, someday, someone might sue me or someday might get a class action lawsuit.
So, what do you do there? Well there is another option for notice and that is you can give a notice of facts and circumstances that could give rise to a claim. But you should be thinking about this as you are getting wind that there might be trouble because you have certain different options and the options relate to which policy you want to put the coverage under, it’s your choice. If you want to put it under one year, you can give notice of facts and circumstances, you want to wait till you have a claim? It’s your option put it under the next year, wait till you have a lawsuit.
But there are pros and cons of doing it each way but it’s something you have to think about and it’s pretty complicated. So, what I would like to say is if you are a corporation and whatever function you are CEO, CFO, general counsel, when you have any sort of, when you are hiring lawyers, you’ve got a problem, I mean not corporate lawyers, but defense lawyers or someone who is trying to help you with the governmental investigation, whenever you go out and hire lawyers, you should think about notice and you should think about insurance.
The reason to think about it then is because if you don’t, mistakes can be made. You might have to tender something and you don’t tender it. You might have to do it one way would be more beneficial than doing it another way and you might foreclose yourself for some right the other ones I have.
Notice needs to be done correctly, there is a general thought that you just give in to the insurance company, whatever it is you just give it to them. That’s not really enough, you need to tell them, you need to follow the language that is required in the policies and you need to think about how you are going to position it.
Your antenna should go up whenever you are hiring lawyers, whenever you have to hire a lawyer to defend you, your antenna should go up and you should start thinking notice, insurance. And then you should start looking at the policies very carefully about how that notice should be given and what your options are.