Are Your Insureds Waiting Too Long to Report a Claim?
Insureds can find themselves in hot water if they fail to report claims promptly to their insurer.
One of the most important provisions for insureds to keep in mind when reporting a directors and officers claim is the notice requirement. Although specific notice-requirement language may vary in directors and officers forms, the intent is always the same: to allow insurance companies to handle claims in their early stages.
According to the notice requirement provision, the insured must give the insurer written notice of a claim as soon as practicable but in no event later than within a certain time period when they are first made aware of a claim or a potential claim. The provision commonly limits the responsibility of the knowledge of a claim to certain key personnel such as the CEO, CFO, in-house general counsel, risk manager and so forth.
The following scenario emphasizes the importance of reporting a claim in a timely manner.
John Doe is the chief financial officer of ABC Manufacturing Company. On January 1, 2019, John received a written demand from a new investor who had recently become a shareholder. The shareholder’s letter requested the company’s prior financial results and valuation documents. John, having been busy addressing other business matters, did not think much of the letter and ignored it.
In March, he received a representation letter from the law firm representing the shareholder making a similar demand and asserting new demands. The letter included time-sensitive deadlines, and a lawsuit was threatened if the deadlines were not met.
A few more months elapsed, and the company was served a lawsuit from the shareholder on June 1, 2019. John forwarded all legal documents of the complaint to ABC Manufacturing Company’s insurance carrier to file a claim. The insurer denied the claim due to late reporting, as John should have reported the initial demand within a reasonable amount of time.
If John had reported the demand when he received it, this claim could have been covered because the insurance company would’ve been able to take immediate action in handling the demand accordingly. Taking immediate action allows insurers to have greater control in defending, settling and cooperating with the insured at the onset of a claim. Also, reporting a claim early on helps reduce the overall cost of the claim, thus preserving policy limits for future claims within the policy period.
Litigation often gets dragged out for long periods of time and can drive up expensive attorney fees and defense costs. The earlier the insurer has control of the claim, the better chance they have in reducing its overall cost. It can be very difficult for an insurer to intervene at different stages of a claim when the insured has tried to take matters into their own hands or when an unnecessary delay in reporting has exacerbated the situation. This can ultimately put the policyholder and the insurer in an unfavorable position and duplicate the effort put into legal resources.
Some insurance carriers have gone as far as incentivizing reporting claims in a timely manner by offering their insureds a reduction on their current retention for doing so. Devon Park Specialty’s management liability product, Executive ViewPoint, features a Timely Notice and Resolution Incentive where policyholders can reduce their retention up to 50% or $10,000 (whichever is less).
This is one of many features included in our Executive ViewPoint policies to help protect insureds and create lasting partnerships.
As always, thank you for your support and business.
Contact and Written By Kenny Bang
Assistant Vice President, Team Leader, Management Liability Product Leader | 844-438-6775, ext. 2923
September 5, 2019