The days when holders of directors and officers insurance were prohibited from stepping in to fill the “gap” between layers of coverage may be over—but hazards remain.
Companies often purchase excess layers of coverage to sit atop primary policies in a tower because of the inability of a single insurer, or group of insurers, to underwrite an entire program.
Today, it’s a good idea to cross-check primary and excess forms for “symmetry” because excess coverage has sometimes been denied for claims that a primary carrier agreed to cover, said Joshua Gold, shareholder and attorney at Anderson Kill, at the firm’s 12th annual D&O Conference last week in New York.
Gold, joined by Ty Sagalow, president of Innovation Insurance Group, and Steve Carabases, senior vice president at The Navigators Group, addressed ways to improve D&O and errors and omissions coverage.
Even the ability of the insured to step in and fill the gap has, at times, been challenged.
Courts have upheld attempts by “excess insurance companies that argue for complete forfeiture of insurance coverage for layer piercing claims if an underlying insurance company pays less than 100 percent of the underlying limits—whether by reason of settlement with the policyholder at a discount or by virtue of insolvency of the underlying insurance company,” Gold wrote earlier for the firm’s Financial Insurance Law Blog.
The “cases depart from the well-established decades-old majority rule (and insurance industry practice) by which a policyholder could recover excess insurance so long as it bridged the gap between the amount of money received from the underlying insurance company and the attachment point of the next in line excess insurance company,” he said.
The way to prevent such situations is to have the policy explicitly state that the excess coverage will drop down by reason of payments by the insured.
As with other issues requiring clarification, it is best resolved “at point of purchase,” said William Passannante, co-chair of Anderson Kill’s insurance recovery practice. “Sometimes you get better leverage while you’re holding the check.”
The panel also suggested purchasing D&O and E&O insurance from the same underwriter to avoid potential coverage gaps between the policies, and checking for symmetry in forms when transferring between carriers.
“Talk to your broker,” said Sagalow.
The panel also urged that “notice of claims” provisions in D&O and E&O policies—requiring insureds to notify insurers of claims within a time frame— be “tethered only to a few high-up individuals” in companies, such as the corporate risk manager.
That way, “if he didn’t know, the notice of claims requirement is not triggered,” Gold said. Alternatively, make notice of claims discretionary.
