If you built a business from scratch, we can presume you had to make some difficult decisions while operating it. These difficult (and sometimes unpleasant) decisions carry the risk of legal liability. Any of the stakeholders could charge or sue you (or any of your directors or officers) for actions and decisions taken during the normal operation of the business. The chain of events could culminate in unpleasant court battles, large expenses, or even attachments of the personal assets of your directors and officers.

This is where Directors’ and officers’ insurance (or simply D&O Insurance) becomes extremely necessary to your Directors and officers and to your company as well. In this article, we will discuss one common query we have received regarding D&O insurance, that is, whether DNO Insurance is a claims-made or occurrence policy. We will also discuss other topics related to Directors' Liabilities insurance.

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Before proceeding to the main topic, let’s start with the basics-

What is a claims-made policy?

A claims-made policy is one that provides benefits when a claim is made, regardless of when the claim event took place. It, however, only covers claims made while the policy is active. A policy of this type is often used to cover the risks that are associated with commercial operations. These policies, for example, are frequently used to cover the possibility of errors and omissions in financial accounts. They are also used to protect businesses from employee claims such as sexual harassment, wrongful termination, and discrimination.

What is an occurrence form of insurance policy?

An occurrence policy offers long-term protection and covers damage claims that happened during the policy's term. Under these contracts, the insured has the right to seek compensation for damages incurred during the policy's active period, even if several years have passed and the insurance agreement is no longer in effect. In other words, a claim can be filed long after the contract has expired if there is evidence that the cause or triggering incident occurred during the period when the insurance was valid.

Occurrence policies are designed expressly for events that may cause injury or damage years later. For example, if a person is exposed to harmful chemicals, it may take some time before he becomes unwell.

Differences between a claim made and an occurrence policy

Claims made and occurrence policies are two types of liability insurance policies. The main difference between them lies in the way they cover claims that arise during the policy period and after the policy has expired. Here are the key differences between claims made and occurrence policies:

  • Coverage Period: Regardless of when the claim is filed, an occurrence policy covers claims that occur during the policy period. This policy covers claims reported during the policy period or within a certain time after the expiry of the policy, termed as the extended reporting period.
  • Premiums: Because claims-made policies only provide coverage for a limited time, they often have lower premiums as compared to occurrence policies. But, as the policy matures, the cost of coverage may rise, and the insured may need to obtain extended reporting coverage to cover claims that may emerge after the policy is expired.
  • Retroactive Coverage: A claims-made policy may have a retroactive date that determines when claims will not be covered. This means that claims arising from events that occurred prior to the retroactive date will not be covered by the policy. An occurrence policy, on the other hand, does not specify a retroactive date.
  • Extended Reporting Period: An extended reporting period may be included in a claims made insurance. Such insurance provides coverage for claims reported after the policy is expired. The duration of the extended reporting period differs, although it normally ranges between one to five years.
  • Tail coverage- It is a kind of extended reporting period that offers coverage for claims reported after the policy has expired and the insured has changed policies. Tail coverage is costly, but it is required to cover claims that emerge after the policy has expired and the policyholder has no alternative coverage.

Directors and Officers insurance -claims made or occurrence?

A D&O Liability Insurance Policy is usually a claims-made policy. This means that it only covers claims that arise and are reported while the insurance policy is in effect. In general, the emphasis in a Directors’ and officers’ liability insurance policy is always on the date of claim notification and the alleged incident date. To avoid complications, you need to notify the insurer of the prospective claim immediately after you become aware of it. Under a D&O Insurance Policy, notifying the insurer of a claim during the policy term is critical.

Here is an example to make it easier for you. Let us assume a corporation acquired a Directors Liabilities insurance coverage for the 2018-2019 fiscal year. In November 2018, a client filed a case against a director, alleging that he changed the terms of a specific contract. Sadly, the company failed to notify the insurer of the claim.
The insurer learned of the claim after the policy term had expired, despite the fact that the company was aware of the incident throughout. The insurer refused to pay the claim because the company failed to notify it during the policy term. Even though the incident occurred during the policy's term, the company contacted the insurer after the insurance had expired. As a result, the claim was invalid under the claims-made policy condition of the D&O insurance policy.

However, under certain terms and conditions, coverage can be extended back to a certain date, from which all losses and risks are covered. This date is termed as the ‘retroactive date ‘. The insured has the option of negotiating the insurance term duration and obtaining coverage for activities starting from the retroactive date. Please note that if you have purchased a policy for the first time, your retroactive  date is the same as the date your policy started.However, while renewing the  policy, you can negotiate with the insurer and make  the earliest date from which you continuously kept your coverage active, as your retroactive date .

Nevertheless, not all insurers offer this service. Those who do will impose an additional premium for it. Some could provide this coverage only if the D&O insurance has no break in renewal.

What are the different types of claims covered by D&O insurance?

Let’s discuss a  few types of claims covered by a typical D&O Insurance Policy-

  • Employment lawsuits

Directors' and officers' liability insurance covers claims filed against a company's directors and officers for alleged improper acts committed while carrying out their responsibilities. Allegations of harassment, wrongful termination, discrimination,  retaliation, and other employment-related claims made by employees or former employees against the company's directors and officers may be covered by D&O insurance. According to policy terms and restrictions, a D&O Insurance Policy may also cover related expenditures such as legal fees and settlements or judgements.

  • Claims associated with failure to comply with workplace laws

Directors Liability Insurance may cover claims of noncompliance with workplace laws. This includes charges that the company's directors and officers violated employment laws such as workplace safety regulations, wage and hour laws, anti-discrimination laws, and other workplace-related laws. D&O insurance may also cover allegations that the directors and officers disregarded their fiduciary duties by failing to comply with these laws. D&O insurance, in other words, protects your company from apparently minor but potentially substantial legal and financial blunders that usually lead to D&O claims. According to policy limits and restrictions, D&O Insurance Coverage may include legal costs incurred in defending against such claims, as well as damages and settlements.

  • Claims associated with alleged failure to meet investors’ expectations

Directors and officers' insurance may cover claims of failing to satisfy the expectations of investors. This can include claims that the company's directors and officers made false or misleading statements or omitted significant facts in connection with the selling of securities, or that they committed other types of securities fraud. Claims may also be filed alleging that the directors and officers disregarded their fiduciary duties by failing to effectively disclose or manage risks, or by engaging in other conduct that negatively impacted the company's financial performance.

If investors lose the money invested in your business as a consequence of any of the abovementioned activities, they may file a lawsuit to recover it. This could place your directors and officers at risk. If your company succeeds to go public, the same investors may decide the share price is inadequate. All these could result in legal action being taken against your organization.

As per policy terms and circumstances, D&O insurance may cover legal fees and costs involved with responding to such claims, as well as damages or settlements.

The footnote:

Claims-made policies are typically less expensive than occurrence policies because the coverage is limited to the policy period. However, they can be more complex due to the need for extended reporting periods, which can be expensive.
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