Most of you know that you need to avoid the dangers of late notice. But what is late notice and what are the ramifications? Since D&O liability insurance policies are what are known as “claims-made” policies, insurance companies will only provide coverage under these policies for “claims” that are:
- First made against an insured during the specified coverage period, and
- Reported to the company in a timely manner during the applicable reporting period.
If a claim does not meet both of these requirements, no coverage will be available. Therefore, failure to report claims to the carrier in a timely manner will frequently result in a complete denial of coverage. To avoid this, an insured must be aware of what the insurance company views as a “claim” and what it will deem to be “late notice.”
The standard definition of a “claim” in an D&O insurance policy includes not only the commencement of legal proceedings, but any “written demand for monetary or non-monetary relief.” While the insured usually recognizes the need to give notice when it is served with a summons and complaint, mistakes are often made when an insured is faced with more informal communications.
In one recent claim situation, an insured failed to notify us or the carrier when it received a letter demanding equitable relief and threatening a lawsuit.
The insured did not report the letter or the underlying facts because it saw the letter as nothing more than posturing in an ongoing negotiation. Months later, when the negotiations gave way to a lawsuit and the insured finally gave us notice and we reported it to the carrier, the company denied coverage based on late notice.
In the company’s view, the “claim” arose when the insured received the threatening letter, not when the suit was ultimately filed.
In the preceding example, notice was given by the insured more than a year after receipt of the threatening letter. That is clearly late notice. But in a typical situation, what is timely notice and what is late may not be so clear.
Most D&O policies require that notice of a claim be given to the company “as soon as practicable after a claim is made.” But what exactly does that mean? A few days or even a couple of weeks will not normally present any problem. But how many weeks or months are too many? We have seen situations where a claim sent to the carrier less than three months after it was received was rejected on the grounds of late notice.
There may be legitimate debate about whether or not that would hold up in court. But who wants to be forced to sue its insurance carrier to get coverage? Especially since you may not win; we have observed that courts are increasingly receptive to insurance company’s denial of coverage based on late notice.
So when it comes to late notice, it is much better to be safe than sorry. Many insureds are concerned that providing notice of potential lawsuits or speculative claims to insurance companies may do nothing more than lead to increased premiums. Nevertheless, if the insured does not give notice in these cases, it may find that it has no coverage when the threat later becomes a lawsuit.