Volume 4

Partners' Perspective

Executive Liability Claims

An executive liability policy is purchased for one purpose - to respond when you need it. So what do you do when you receive a claim? Panic? Be cool? Set it aside and make a mental note to eventually get around to responding, because (obviously) it's groundless? To paraphrase your elementary schoolteacher, "you can do anything you want, but your insurer may only respond if you take the right course of action." This issue of The Partners' Perspective outlines the initial steps you should take in order to have your insurer favorably respond to your claim.

There are a number of insurance policies designed to transfer some of the risk of running a business from individuals and firms to insurance carriers. These policies include:

  • Directors' and Officers' (D&O) - Coverage for errors, misstatements, misleading statements, acts, omissions, neglect and breach of duty by covered persons and the company.
  • General Partnership (GPL) - Coverage for a private equity or venture capital firm, its partners, management, and employees for their actions as buyout professionals, including work with limited partners, target companies and portfolio companies.
  • Employment Practices (EPL) - Coverage for breaches of employment contracts, discrimination, harassment, retaliation, workplace torts and wrongful employment decisions.
  • Fiduciary - Coverage for breaches of responsibilities, obligations or duties imposed upon fiduciaries by ERISA.
  • Professional (E&O- Errors & Omissions) - Coverage for professionals' alleged or actual mistakes; can be specifically worded for investment advisors, lawyers, internet or media, architects and engineers, or other professions.

These lines of coverage are commonly referred to as Executive Liability. The events that these policies cover (mismanagement, errors, etc.) are called Wrongful Acts.

There is an important difference between wrongful acts and the types of events that trigger coverage on other lines of property-casualty insurance: the time period. A building fire, automobile accident, or workplace injury usually occurs over a short period of time. However, a wrongful act usually occurs over a longer period of time. For instance, when does a management team mismanage a company? When they are first hired? When they reorganize the firm? A year later when the reorganization fails to yield higher profits?

To respond to this gray area, executive liability policies are written as Claims Made policies. A claims made policy provides coverage of claims for wrongful acts that are first known and reported during the policy period, subject to continuity of coverage. This means that in the event of an executive liability claim, you must notify your insurer promptly. Every executive liability policy provides slightly different definitions of claims, knowledge of claims, and prompt notification to the insurer, but there are some general guidelines:

  • Claims usually include written demands for damages, lawsuits, EEOC investigations, and civil proceedings. Some policies include oral demands. All policies include provisions to notify insurers in the event of a circumstance - an act that has not yet led to an official claim, but you have reason to believe it will lead to a claim.
  • Knowledge of claims can mean that it is known to any director, officer, partner, committee member, employee, or foreign equivalent.
  • Notification to the carrier is usually required "as soon as practicable" - defined by some carriers as within 30 days of knowledge to anyone at the insured entity. Other carriers allow 45 days from knowledge of the president, general counsel or risk manager.

An insurance carrier has the right to deny coverage for a claim if an insured does not adhere to the policy language for claims reporting. In the event of all actual or suspected claims, we recommend that you take the following steps:

  1. Gather all pertinent information regarding the situation. This includes all written correspondence with the claimant and claimant's legal representative, internal documentation (business or employment contracts, personnel files, etc.), or summaries/testimonies provided by the parties involved.
  2. Review the situation with your insurance broker and legal counsel. Allow them to help you determine whether the situation qualifies as a claim.
  3. Report the claim to the insurance carrier according to the terms of the policy. The policy will outline what information must be included, as well as where, how, and when it must be sent.
  4. Respond promptly to the insurer's acknowledgement of the claim and any requests for further information. The insurer is on your side. They have extensive experience, access to top law firms with pre-negotiated defense rates, and an incentive to defend or resolve the claim with the best possible outcome for their insured.

One area where the notice provisions are often overlooked is EEOC investigations. The Equal Employment Opportunity Commission is the division of the federal government that oversees most laws regarding discrimination, harassment, and worker protection. Laws require that employees notify the EEOC first before suing an employer. In one case, a manager at a local subsidiary received an EEOC investigation notice followed by a finding of no cause by the EEOC. The manager set aside the claim, and the firm purchased EPL insurance. A year later the employee filed a lawsuit and the insured noticed the new EPL carrier. The carrier denied coverage because the official claim (EEOC investigation) occurred and was known (to the local manager) before the policy period.

The preceding example is offered to illustrate how a claim can easily be overlooked. Insurers cover thousands of claims each year, but do so under the written provisions of the policies. As always, the best defense is prevention. All policyholders should review their internal management, investment, and employment policies with qualified counsel, consistently follow the set procedures, and review questionable decisions with counsel before they are finalized. Most insurers provide these services to their policyholders for free or discounted rates.

An executive liability claim can be a very stressful event- one's professional or even personal integrity will be held under a microscope. Informing your insurer quickly and properly will allow them to help you in your time of need.

Equity Risk Partners appreciates this opportunity to be of service. Please feel free to contact your Equity Risk Partners professional.