If a claim is filed three years after your company files for bankruptcy, will you be covered? To answer this question, you need to know a little about occurrence vs. claims-made D&O policies and whether you have suitable tail coverage.
Occurrence vs. Claims-Made Policies
Liability insurance policies typically work on either a claims-made or occurrence basis.
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An occurrence policy provides coverage for claims arising from events that occur during the policy period, even if the claims are made after the expiration of the policy period.
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A claims-made policy provides coverage for claims that are made during the policy period, as long as the event did not occur prior to the retroactive date. This means that incidents that occurred before the policy became effective can be covered in some cases.
While commercial general liability insurance is typically written on an occurrence basis, management liability policies – including D&O policies – are written on a claims-made basis.
The Impact on Claims
Lawsuits do not always occur immediately after the event that allegedly caused injury. In fact, there can be a gap of years between the event and the resulting legal proceedings. As a result, the details of your policy terms – and specifically whether you have claims-made or occurrence coverage – can determine whether or not you have coverage for a lawsuit.
For example, let’s say your company is facing a copyright infringement lawsuit that you believe should be covered under the advertising injury provisions of your commercial general liability insurance policy. This policy works on an occurrence basis, so as long as the alleged copyright infringement occurred while the policy was in force, you should have coverage, even if the lawsuit occurs after the policy lapses.
On the other hand, let’s say you served as an executive officer in a small public company that has since declared bankruptcy. The company no longer exists, and its insurance has lapsed. Now investors are filing a D&O lawsuit over alleged misrepresentations, and you have been personally named in the lawsuit. Even if the alleged misrepresentations occurred during the coverage period, coverage may not apply because you have a claims-made policy and the claim is occurring after the coverage period has lapsed.
This scenario is admittedly alarming for most executives and board members. Fortunately, there is a solution: tail coverage.
How Tail Coverage Extends Protection
Tail coverage provides an extended reporting period for claims-made policies. This extended reporting period typically lasts for a fixed period of time. With this provision in place, policyholders retain coverage for claims that occur after the policy expires, as long as the tail period has not ended.
For example, let’s say your company has a claims-made D&O policy with tail coverage that offers an extended reporting period of six years. If your company goes out of business and your policy is allowed to lapse, your tail coverage will continue to provide coverage for claims that occur for an additional six years. This is critical because this time period – when investors are grappling with their losses – is when lawsuits are likely to occur.
Do You Have Sufficient Tail Coverage?
Without tail coverage in place, the directors and officers of a failed company could face personal liability without insurance after the company closes and its policies lapse. Securing tail coverage is therefore of the utmost importance – but not all provisions provide equal protection.
Ask yourself:
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How long does the tail last? It can be cheaper to buy a tail with a very short extended reporting coverage period of around a year or so. However, this may not be adequate because lawsuits can occur several years after a company fails. A longer tail of six years is more expensive but it provides superior coverage.
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Are you covered? It’s important to verify that the tail covers the executives and not just the company. You can’t buy individual executive tail coverage for D&O, so you need to ensure that you are covered under the company’s policy.
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Do you have sufficient excess Side A coverage? This provides additional protection for directors and officers when the company cannot provide indemnification, for example, because it has gone out of business. Robust Side A coverage is critical to ensure that the individual executives, and not just the company itself, are protected.
Although you hope that your company will succeed, the reality is that many startups fail. Directors and officers should ensure that their personal assets will be protected if the company goes out of business, and this requires robust tail coverage.
NSI Group offers D&O coverage options designed for startups, including a six-year tail built-in with coverage for the individual executives named in the policy so executives don’t have to share coverage limits with the organization. Contact us to learn more or Request a free D&O analysis.
