Bridging the gap

For many brokers, working on their clients' directors' and officers' (D&O) policies is not an everyday event, and unless a client is working within the financial sector, D&O is usually only a small part of the overall premium spend. While the higher priced property and liability policies are regularly analysed in great detail by brokers ≠- often as a means of demonstrating expertise - D&O policies are habitually overlooked. And yet to directors who face personal exposure as a result of their service to a company, protecting personal assets may be just as important as protecting business assets.

Therefore, a little research into what makes a good D&O policy is a wise investment for brokers wishing to provide comprehensive advice to their clients and a higher level of service than their competitors.

Here are some key factors to consider when selecting a D&O policy:

Avoid the late reporting trap

D&O policies are typically written on a claims made basis. Some D&O policies only provide cover if a claim is made to the insurers on or before the last day of the policy. This can place a great deal of responsibility on the insured as the renewal date approaches, if circumstances arise that could lead to a claim - if it is not reported to insurers before the expiry date, then coverage may be lost.

Other policies, however, provide the insured a grace period of 15 to 30 days after expiry within which a claim arising before expiry can be reported. So it is important that the insured knows the type of policy they have and that they react accordingly.

Moving prior litigation dates

Moving the prior litigation date when switching policies can cause problems with coverage. Whereas a retroactive date will exclude claims that arise from events occurring before that, the prior litigation date is there to prevent the insurer paying claims that have already been made or one that the insured already knows about when taking out the policy. However, when writing a policy for the first time an insurer will sometimes seek to reset the prior litigation date to coincide with the new policy inception date. Therefore, by moving to another insurer that imposes a new date - depending on the new insurer's policy language - a gap in coverage could arise, which the insured may not have considered.

For example, if the new insurer's policy states that any official investigations or legal proceedings that have commenced before the prior litigation date are excluded, then any such investigations and proceedings that have commenced but the insured does not become aware of until after the inception of the new policy would not be covered. However, they would have been covered had the prior litigation date remained unchanged or the new insurer's policy language referred to claims known about by the insured.

When utilising policies with prior litigation dates it is preferable for them to remain at the date the insured first purchased D&O and only exclude claims and circumstances the insured actually knows about.

Extended reporting periods or discovery periods (ERPs)

Unlike periods of grace allowed shortly after expiration, ERPs are for longer periods - usually between 12 and 36 months - and the insurer charges an additional premium for them. Within these dates, the insured can report claims to insurers that occurred during the policy period but only came to light after its expiry.

Often overlooked at the time of underwriting, they can become invaluable to the insured who cannot obtain similar renewal terms after a large loss, or whose situation changes and a renewal policy is not required such as in the event of a business disposal or administration. Unfortunately, these clauses tend to vary greatly and, once in force, many insurers are reluctant to allow changes. Therefore, it is important that the insured is aware of the applicable ERP conditions prior to taking out the policy.

From an insured's perspective, it is desirable for the ERP provision to be as flexible as possible, preferably invoked by either the insurer or the insured, for example a bilateral discovery, and with as few preconditions as possible. And it should be available to the insured for a reasonable time frame after the policy has expired; usually insurers must be notified between 15 and 30 days after expiry with premiums payable within 60 days.

Takeovers, mergers and acquisitions

With the number of D&O policies underwritten on the basis of application forms declining, and many risks now being underwritten on statements of fact only, the need to be aware of all of the insured's activities - both at the time of underwriting and throughout the policy period - has never been so important.

D&O policies are somewhat unique in how they handle changes in organisational structure such as a share sale or the raising of finance. These events are often significant to a D&O insurer and, depending on the extent of the financial changes involved, nearly all D&O policies require their timely notification. If the changes are notable, it is likely insurers will impose different policy conditions going forward.

Takeover, merger and acquisition clauses also appear in nearly all D&O policies and are often being used as sales tools by insurers to promote their policies. It is therefore important that the insured is aware of them.

Typically, in the event of more than 50% of the shares or assets changing hands, policies will require the insured to give insurers prior notice. After the transaction has gone through the policy will often only provide coverage for claims arising from events that occurred beforehand. In effect, the new owners would need a fresh policy or reach agreement with insurers to continue the D&O policy.

Acquisitions are usually automatically covered up to a pre-determined percentage of the insured's assets and must be notified to insurers beyond that. To obtain coverage for takeovers, mergers, acquisitions or subsidiaries that involve any exposure in the US or Canada, the insurer's prior agreement will almost always be needed before coverage can be given.

As you can see, there is much to be considered when working on a client's D&O policy but by taking these points into consideration brokers can be assured that they have provided the best coverage for their client. n

Mark Shreeve is chief executive of Angel Underwriting