Use caution in changing D & O insurance carriers: why changing carriers could cost you a lot of money in the long run.

• Author: Weiss, Stephen J.
• Position: D & O INSURANCE UPDATE

ONE REASON companies change D & O insurance carriers is to save money. A lower premium is a worthy goal. But even if the terms offered by a competing carrier are identical, this switch can create a gap in coverage. In particular, a company should focus on: (1) whether the new policy will provide continuity of coverage; and (2) the effect of any warranty statement required by the new carrier.

1. Continuity of Coverage

   D & O policies are claims-made policies, meaning that generally they cover only claims made against the insureds during the policy period. In addition, many D & O policies contain a "prior acts" exclusion, which excludes coverage of claims alleging wrongful acts that occurred prior to a specified date, referred to as the "continuity date." D & O carriers commonly specify the date you first purchased coverage from that carrier (possibly years ago) as the continuity date.

   If you change carriers and the new policy contains a prior acts exclusion and specifies a continuity date that is its inception date, continuity is disrupted and you could face a gap in coverage. Consider this example. Your new policy's inception date is January 1, 2006, and an otherwise covered claim is made on March 1, 2006, alleging a wrongful act that occurred on December 31, 2005. That claim is not covered under your old policy because it was made after the old policy period expired, nor is it covered under your new policy because the alleged wrongful acts occurred prior to the new policy's continuity date.

   If you are considering switching carriers, negotiate for "full continuity" so the new policy will cover claims that occurred after the continuity date of the prior policy. To do so, the prospective new carrier must either delete its prior acts exclusion or use the same continuity date as that of your old policy.

2. Warranty Statement

   A gap in coverage can also arise if the new carrier requires the insureds, either in response to a question in its application or in a stand-alone warranty letter, to warrant that no proposed insured is aware of any facts or circumstances that could give rise to a claim and to list any exceptions. Like a prior acts exclusion, such a warranty statement can produce a gap in coverage because claims arising from any listed circumstances will be not be covered by the new policy because of the warranty, nor by the old policy because it has already expired.

   If the proposed carrier refuses to drop the warranty statement requirement...