A lesson in timely claims reporting

​A recent appeals decision denied coverage to a company on its directors and officers (D&O) liability insurance policies for taking too long to file the claim.
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In this case, the 5th U.S. Circuit Court of Appeals in New Orleans sided with an insurer that had denied a claim a company had made after being sued for failing to pay overtime wages to nonexempt employees.

The insurance company had denied the claim because the first employee's claim was made in August 2014, but the company failed to inform the insurer of that and subsequent claims until September 2015.

This case illustrates the importance of filing claims in a timely manner.

When the employer finally did file the claim it had an in-force D&O policy with the insurer, although there was an earlier policy in force when it had received the first claim of failing to pay overtime.

Under the policy in force at the time of the first claim, the insurer would have been obligated to pay all claims made against the company under the policy.

"That earlier policy would have provided coverage except that the insured failed to comply in 2014 with a notice provision. We conclude the district court was correct to rely on this difference," the three-judge panel in the appellate court wrote in an opinion that upheld a lower court's ruling.

One of the critical obligations of an insured is the duty to timely report claims or circumstances that may give rise to a claim. Failure to report a claim per the policy requirements can result in a claim being denied, or worse, having the entire policy voided.

D&O policies are "claims made" policies, meaning that coverage exists only for claims made during the period the policy is in effect. Claims made while no policy or extended reporting period are in effect are not covered.

Claims-made policies also have retroactive dates. Ideally, the retroactive date is the day the insured started a business, but it can also be the day that it first purchased professional liability coverage.

Assuming the retroactive date has not been advanced, the policy in force when a claim is made is the policy that will respond, regardless of when the negligent act, error, or omission took place.

However, there is one crucial qualifier. This insurance applies to claims that took place after the retroactive date, but before the end of the policy period, provided the insured did not know about the claims before the effective date shown in the declarations.

In other words, if you knew of a claim prior to the time you renewed your claims-made policy but did not report it, and if a claim is subsequently made, the insurance company can deny coverage. It doesn't matter whether or not it's been continuously renewed by one insurance company; the policy excludes it.
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This underscores the importance of timely reporting of all claims before renewal each year.