When a directors and officers (D&O) claim is declined, it can be catastrophic for an insured, forcing the company to deal with “the financial costs of a claim or loss entirely on its own,” according to a report published by Marsh.
As a result, insureds must be careful not to do anything that “could undermine the protection that the policy is intended,” said the report titled “Professional and Management Liability Insurance Claims: Common Pitfalls for Unwary Policyholders.”
Such “unwary policyholders” can find themselves in difficulties if they fail “to take certain steps prescribed by the policy, either at all, or in a manner compliant with the policy wording,”
While the report focuses on UK issues, Marsh said the problem of declined claims has “global relevance,” as does the obligation to cooperate with insurers, which is likely to apply equally to other types of insurance.
Fortunately, the report said, less than 1 percent of financial lines claims made by Marsh UK clients were declined by insurers between 2011 and 2015, which shows that such declinatures are very rare.
The report highlighted the key themes that recur in most declined claims.
“The largest proportion of declined claims results from a failure to notify in accordance with policy requirements or time-frames, or at all,” said the report, noting that this accounts for 39 percent of declinatures among Marsh’s UK clients. “This is a very important consideration for insurers and an obligation that they take very seriously.”
In addition, almost one-third of declined claims relate to the triggering of cover and obtaining insurers’ consent to settlements and non-disclosures, while policy exclusions account for 31 percent of claim declinations.
“Insureds should engage their insurers early on in the event of a claim, as they can provide valuable assistance in minimizing the financial loss, as well as the reputational damage, that liability claims can bring,” Marsh emphasized.
Avoiding Policy Pitfalls
“Organizations should review the terms and conditions of their policy wordings as soon they are received, not simply when a claim is first made, or worse, once it has developed or settled,” said Robert Lewis, claims leader, UK Risk Management Practice, Marsh.
The Marsh report provided pointers to help insured avoid policy pitfalls including the following:
- Examine the policy wording to identify the policy trigger.
- Notify your insurers of any claim or circumstance within the correct time period and in the correct manner.
- Seek insurers’ consent before instructing counsel, incurring defense or mitigation costs, admitting liability, or settling any third-party claims.
- Cooperate with reasonable requests from insurers for information regarding the claim.
- Pay particular attending to “conditions precedent” in a notification provision.
Upward Trend in Notifications
Marsh said that D&O claim notifications from its UK clients have risen steadily over the past decade and remain four times higher than pre-financial crisis levels.
Between 2005 and 2007, Marsh recorded an average of 200-300 D&O liability insurance claim notifications. With the onset of the financial crisis, claim notifications rose by 75 percent to nearly 500 in 2008, before peaking at 1,685 claim notifications in 2012.
Since 2013, Marsh has received an average of approximately 1,300 D&O claim notifications annually in the UK.
“The increasing volume and complexity of regulatory activity in the UK and the European Union is a major driver of this upward claims notification trend,” explained Lewis. “There is also an increasing level of cross border co-operation among regulators and a shift towards class or collective actions across EU member states.”
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