What other hidden coverage gaps does a business leader need to be aware of?
Make sure you have coverage for all subsidiaries or affiliated companies. Most D&O coverage applies automatically to majority-owned affiliates; it does not cover minority-owned companies. If you have a 40 percent interest in a company and are sued through a D&O claim, if you didn’t schedule that on your policy, it’s not covered. Next is legal defense counsel. Normally, counsel is chosen by the insurance company. But it’s important that you have the right to choose your lawyer.
How can you keep an insurance company from canceling your policy?
Most D&O insurance policies can be cancelled by the insurance company with 30 to 60 days’ notice for any reason. Make sure the insurance company can’t cancel it once you’ve paid the premium. If a lawsuit is filed, the insurance company may have to defend it, but then it cancels your policy, eliminating coverage for any additional potential claims. It seems unfair, but it can do it.
You’re buying this policy to be an insurance bulletproof vest to protect you against all these companies that want to do you financial harm. But the insurance company can cancel the policy on 30 days’ notice. When is that important? When somebody just sued you and you’re worried about another claim. Many insurers will agree upfront not to cancel your policy during the current policy term other than if you fail to pay the full annual premium.
How can you prevent an insurance company from denying coverage for a claim?
Make sure severability is included in the application for your policy and for the exclusions that are part of your policy. When you apply for a policy, you provide financial information and statements about your knowledge of potential claims, or errors that can result in claims. If you misrepresent information in the application and a claim results from that, insurance companies can try to deny a related claim or rescind the policy in its entirety.
Severability means they will only rescind the policy or otherwise deny coverage for the individual who misrepresented information. Instead of tearing up the application, they’ll only deny coverage to those individuals who provided false information. Exclusions typically apply so the insurance company won’t cover claims based upon deliberate wrongdoing, fraud or other criminal acts. The policy may still be in effect, but that particular claim that was due to alleged fraudulent or criminal conduct will not be covered. Severability of exclusions means that an exclusion will only apply to the individuals who did those bad things; the innocent party will still be covered.
Also, make sure the policy covers you until final adjudication. If you’re accused of criminal acts, that doesn’t mean you did it — final adjudication wording means the policy will defend you until a court convicts you after all appeals have been completed.
Making the recommended changes in the application and policy language will assure protection remains for the good guys.
Philip K. Glick is senior vice president with ECBM Insurance Brokers and Consultants. Reach him at (610) 668-7100 x1310 or [email protected].
