Notice-Prejudice Requirements in D&O Policies

I have been considering the article of November 23, 2015 written by Joe Monteleone of Rivkin, Radler and posted on www.dandodiary.com.  Historically, a major issue in managing claims and in policy drafting for D&O and E&O policies has been the timely notice of a claim.  The insurer obviously wants notice as soon as possible of a claim made against an insured in order to manage the claim and hopefully obtain an efficient claim result.  Insureds, on the other hand, often want the longest time period possible in which to report a claim, so that they can avoid the problem of late notice and having a claim denied on that basis.

The basic two pronged requirement of a claims made and reported policy is that (1) the claim against an insured must be made during the policy period, and, (2) the claim must be reported to the insurer within the policy period, or within some expressed "cut-off" date after expiration of the policy.  As many insureds asserted, if a claim is made at the very end of a policy period, it might take some time for the Risk Manager, General Counsel, etc., to be served and become aware of a claim.  Thus, carriers have been willing to provide this extra time, typically 60 or 90 days after policy expiration, or to use as soon as practicable language.  However, in either case, timely notice has been necessary and the courts have held up requirements as it is not unreasonable for an insurer to require notice before its interests are prejudiced by the insured's actions or inaction in regards to a claim.

The trend of the past years, as capacity remains large in the market and the pressure to write business has not decreased, is for new carriers to enter the market and offer broader coverages than the legacy carriers, who then must offer broader coverage to compete with the newer carriers, and so on and so on.  Despite the fact that courts have enforced notice prejudice language in most cases, we are seeing broader provisions come into the market.  

Extending the notice provisions to 90 or 180 days, as some carriers have done, could result in a claim being made and not reported to an insurer for almost 18 months.   As a former claims counsel, I perceive great peril for carriers in that situation.

Now, in some large company D&O forms, the insurer is taking on the burden of proving  that in order to deny coverage for failure to provide timely notice unless the Insurer can demonstrate that its interests were materially prejudiced by reason of such late notice.  

From a legal perspective, this is an amazing extension of coverage being offered and there is no legal precedent requiring it that I am aware of at this time.   I can foresee frustrated claims managers in the future often feeling that their only role is to cut a check when a D&O claim comes in if they have no notice-prejudice rule to rely upon.   

As is often the case, when the horse gets out of the barn, it is hard to get it back in.  If insurers later decide that this language is unwise, it will be very difficult, if not impossible, to pull back to language much closer to the historic basis.  Even if the market does "harden" in terms of rates and premium increases,  this language, along with other coverage extensions which have been made in D&O policies over the years, may be difficult to reverse.  Even if there is no legal precedent so requiring them in the first place. 

I leave it to Joe's article for specific legal references and his views may or may not track my own.

What do you think?

Keith Daniels is an attorney who served as coverage counsel on D&O, EPLI and professional liability claims for Lloyd's of London syndicates and other carriers while in private practice; and as a product manager and product development director on management and professional liability products.  He has analyzed numerous carriers policies and has written several policies in use by several carriers today.  

His opinions in this article are his own and do not represent the views of anyone else or any other entity.