Knowledge Knuggets, 11/13/2008 & 11/20/2008
With financial turmoil and uncertainty abounding, now would be a good time to discuss the impact of policy provisions pertaining to bankruptcy and/or insolvency.
There are two types of entities who can be affected by these provisions: Your agency, and your clients.
Your agency E&O policy most likely has an exclusion that eliminates coverage if a carrier with whom you have placed business becomes insolvent. These exclusions can appear in two forms. One excludes coverage for all claims arising from business placed with any carrier who becomes insolvent. The other excludes coverage for claims arising from an insolvent carrier’s inability to pay claims.
As you can imagine, the first form is a significantly broader exclusion and can prohibit coverage for claims arising from the simplest error or omission, for example, a failure to process an endorsement, regardless of whether the company’s actual insolvency impacted the claims payment at all.
There are many carriers who use the more narrow exclusion where coverage is only impaired if the carrier fails to make a payment.
In your insured’s policies, you will want to make note of the bankruptcy/insolvency provisions that may limit coverage. Many policies specifically state that the carrier’s obligation under the policy will not be impaired by the insured’s insolvency or bankruptcy. Some carriers are silent on the matter. Others have an exclusion that indicates they will not provide coverage for any claims arising from the insured’s bankruptcy or insolvency.
Here’s a mind-bender for you: If your insured’s policy says that the carrier’s obligation will not be impaired by the insured’s insolvency or bankruptcy, AND there is also a bankruptcy/insolvency exclusion — what happens to a claim where a wrongful act occurred right as the insured was slipping into insolvency? Which provision will prevail? How will the claim be adjusted? Who gets to determine if the claim “arises from” bankruptcy/insolvency?
There are two more things about insolvency/bankruptcy that can be very important to your clients.
1. Change of control — if your insured is taken over by a bankruptcy court, or even if they are lucky enough to find an Angel investor who buys more than 50% of their shares, it is quite possible that the transaction will eliminate go-forward coverage under their professional liability policies. This includes their E&O, D&O, EPL, and other forms.
For most, but not all, of these policies, there is a “change of control” or “transaction” wording that mandates that coverage stop the very day the originally underwritten shareholders or board lose control of the company. The policy continues on, but only as a reporting vehicle. Premium frequently becomes fully earned. This means that wrongful acts occurring *after* the date of the transaction are Not Covered! This is usually the last thing on your insured’s mind…but it won’t be if they have an uncovered loss. It is usually feasible to write a new go-forward policy, so do not let this gap go unaddressed.
2. Tail, aka Extended Reporting Period. After a transaction, or even if the insured just decides to non-renew coverage as a cost-cutting measure due to threat of insolvency, tail should be offered. Again, it is usually the last thing on the insured’s mind. But if you offer it, and they reject it, you at least have a defense when they try to blame you for the uncovered loss that finally drives them over the edge.
Note — there are some policies that offer only a “unilateral” tail. This means that tail is only available if the carrier terminates, cancels, or nonrenews the policy. If you have an insured who is having issues and may need to cancel or nonrenew coverage, do not hesitate to request tail anyway. Sometimes the carriers will make an exception for this type of situation. If the insured wants tail so they can switch carriers to save money, the incumbent is not so disposed to assist. But if there’s a genuine emergency, and the insured just cannot continue coverage, some have been known to be flexible.
Also, note that if the insured cancels for non-payment of premium or non-reimbursement of a deductible, tail is generally not available.