When used strategically, the notice of circumstance provision can provide risk managers with an opportunity to provide create more certainty around potential claim situations.
Reporting a notice of circumstance of a potential claim situation to your directors and officers program can be a complicated matter, and when doing so, risk managers should proceed with care. It is up to the insurer whether the notice will be accepted should the situation evolve into an actual claim. The notification to your insurer, therefore, should be well-articulated and coordinated with your broker.
Nearly all D&O policies are written on a claims-made basis – for coverage to apply, the claim must be made during the policy period. All well-written D&O policies allow insureds, on an optional basis, to give notice of circumstances that may give rise to a claim — thereby providing insureds with expanded reporting benefits under the D&O program. Noticing a circumstance is an important consideration at the time of policy expiration or in the event of change in program structure.
Advantage, Disadvantage of Noticing a Circumstance
D&O policies are generally triggered when the definition of claim is satisfied but, while the policy will include some language on how to treat notices of circumstance, it is not necessarily a defined term under most policies. As a result, risk managers may find themselves determining the potential benefits and outcomes of noticing a circumstance.
If the insurer accepts the notice, any future claim based on the circumstance described in the notice will be deemed to have been made when the notice was given, and in this way, provides a vehicle for noticing future related claims even though the policy term has expired.
On the flip side, if the insurer doesn’t accept the notice because it lacks specificity, as explained later, a future claim based on the facts in the notice may not be covered under the expiring policy or the going-forward policy if certain language is not included, as described later as well.
Determine How to Define the Event with your Broker
The first question you should ask is if the triggering event is a claim (as defined in the policy) or a circumstance. Understanding how to define the event and whether to provide notice of it can often require additional guidance from your broker, depending on the situation.
What can constitute a potential claim situation? Here’s an example: A “trolling letter” is sent to you from a plaintiff’s law firm that doesn’t articulate a specific wrongful act. It can be sent as a press release, for instance, asking individuals to contact the law firm if they believe they have been aggrieved or misrepresented by your organization for a specific act. The law firm is attempting to build its class of plaintiffs for the matter. It may not constitute a claim, and it may not articulate a specific wrongful act. However, as you approach renewal of your D&O policy, you may want to give consideration as to whether, based on the specifics of your notice of circumstance provision, you could notice this developing fact pattern as a situation that may result in a claim.
Because each circumstance is fact-specific and requires a strategic approach to address fully, successful risk managers bring in outside counsel and collaborate with their D&O broker to help think through all of the available information and draft a well-crafted notice letter.
Decide Whether to Provide a Notice of Circumstance
There is strategy involved in whether to notice a circumstance because there are both benefits and risks for the insureds — with much of the risk occurring if the notice is insufficient. When noticing a circumstance, the insured is putting a marker in that policy period. If something arises in the future, the insured must go back to what was noticed as a circumstance in the current policy. In most D&O policies, circumstance reporting is encouraged but not required.
Reasons for Circumstance
There are many strategic reasons for tagging and expiring policy with a future claim. Some factors to take into consideration:
Will the business be moving to a new insurer?
Do you have the specifics to satisfy the notice requirements?
Is the current limit unencumbered?
What is the breadth of coverage under the current policy?
What are the relative limits and retentions of the current and going-forward policy?
What are the current market conditions: hard or soft?
Will there be a specific matter exclusion on the going-forward policy, and how broad will it be?
Will notable new exclusions, such as COVID-19 or other event-driven issues, be added at renewal?
What is the wording of the prior notice exclusion?
Have you already been required to give the insurer loss information that deals with the circumstance?
It’s advantageous to stay in control of the decision whether to provide notice, if possible. If your new insurer knows that the event has happened, it could put a specific exclusion on the policy relating to that event. If that happens, you may lose control of the decision and be forced to notice the circumstance in light of the exclusionary language.
Ultimately, there’s no right or wrong answer, and your broker can consult with you to help make an informed decision. Keep in mind that there’s also a third category of event, known as a pre-claim, that falls between a claim and a circumstance. If you’re unsure whether the event is a claim or a circumstance, you may be dealing with a pre-claim. In this case, consult with your broker for advice on how to proceed.
Give the Appropriate Amount of Specificity in the Notice
When providing notice of circumstance, you should be aware of the specificity requirements contained in the policy language. There is an art and science to the notice — it must be broad enough to describe an event that could come about in the future and relate back to the noticed circumstance, but narrow and specific enough to meet the requirements. If the insured does not satisfy the specificity standard, the insurer could reject the notice, which can impact coverage going forward.
Most policies have a notice of circumstance provision that sets out the type of information you need to give to the insurer to satisfy the specificity requirement. In the absence of specific criteria, you must rely on the common law. As a general matter, there’s no clear rule to determine whether the notice given is sufficient. This can create coverage uncertainty, and it's the reason why it’s advantageous to have specific criteria outlined in the notice provision in the policy.
Policies typically require policyholders to identify:
- The potential claimants (e.g., shareholders)
- The insured defendants (e.g., the board)
- Likely allegations of wrongful acts (e.g., breach of fiduciary duty)
- Dates the acts were committed
- Reasons for anticipating a claim
- How the policyholder became aware of the circumstances being reported
With the rise in D&O litigation, it’s important to consult with an experienced broker and insurance professional. An experienced broker can help with the phrasing of the notice letter to achieve the balance of art and science required for optimal outcomes.
Be Proactive About your Organization’s Potential Risks
Risk managers should know what their company’s potential claims are and set up a process to vet circumstances that could arise. This process should cover both internal and external events.
Internal circumstances can occasionally lead to future claims arising from legacy events. For example, there could be an HR-related investigation that, at the time, you don’t think of in terms of a D&O issue. But later, due to a social movement or other event, it could turn into a class-action lawsuit. Then, the question arises as to whether the investigation should have been included in the notice of circumstance.
Event-driven litigation — which could be related to a wildfire, cyber breach, lack of board diversity, or other issues -- can give way to a D&O matter. So it’s important that risk managers think through long-term risks with an insurance professional when developing their notice of circumstance strategy. There are several nuances, but a proactive approach can help companies manage them better.
A notice of circumstance strategy, developed with the guidance of industry specialists, can be valuable for risk managers. The key is to be thoughtful and proactive and bring in experienced counsel and insurance professionals to achieve the desired outcomes.