Prior Acts Included
By Tim Kolacz
Directors and Officers coverage is designed to protect those people that help run the company and drive it’s path into the future. But what about before the current group got there. How about those that will come after the current group. Making sure that the Board has protection is a key part of getting, and /or keeping, great people to help run the business.
Whatever business you are in, medical device, non-profit, public companies, most of the time, there is a Board of Directors. The Board will help the CEO and other C-level execs at the company focus their efforts so that the company can be as successful as they want it to be. Non-profits are great at bringing in a strong group of people with philanthropic histories and understanding of the space. Large public companies can recruit other CEOs and CFOs from other industries to help guide them through challenging times with their diverse backgrounds. But the key in getting them to provide their expertise is to properly protect them in case some of their advice adversely affects the business.
This is where D&O coverage comes into play. At its core, the coverage allows for defense and damages in the form of money to be paid to a claimant in case of a damaging result of the recommendation of the board. The board members are allowed to be covered under this policy and no one should ever join a board without this type of policy in place. The policies are pretty straight forward and can cover all current, prior, and future members of the board. The process is very candid as any untruthful answers can land the company in deep bandini. One of the key parts of this type of policy is the Prior Acts provision.
Prior Acts are classified as unknown facts that could lead to a claim. Most of the D&O policies will have a retroactive date attached to them. This date is directly related to when the policy was first enacted and will be designated on the policy. These come into play when a policy is moved from one carrier to another or when a policy has been cancelled due to claims or some other situation. It is important that the retroactive date be included in the new policy so that any unknown claim that comes up in the new policy will have coverage. There is a caveat to this however.
In some cases, as we have seen one just recently, there is the ability to have all of the unknown prior acts of a company to be included, all the way back to the inception of the company. “How”, you say, “can this be done?” Well, in some cases, the carrier will not include a retroactive date on the policy and add in that all prior acts can be included. This is because the D&O policy is what is called “Claims-Made”. This means that when a claim is submitted, “made”, the current policy will need to respond. Even though the event that is driving that claim happen 6 months ago and was on a prior policy (even with a different carrier), because it was brought up today, the current policy will need to review the claim and respond. What’s cool about not having the retroactive date included is that now, any claim that is submitted will elicit a response from the current carrier; all the way back to inception of the company. This means, in our recent case, that while the company has only had D&O coverage since 2005, the new policy will cover any claim that is filed with them all the way back to when the company first come into being. The company came into being in 1921.
So, how can they do this, provide coverage back almost 100 years when, most likely, the insurance carrier did not exist in 1921? They can do it because the carrier knows that this is a nice selling point, that the likelihood of a claim from 1921 is inconsequentially small, and that if the company knows about any such type of claim, that claim would be excluded.
Now, not everyone will provide this extension of coverage, but we ask for it on our policies to see if we can get it. If you don’t ask, then the answer is always no. The more you know, the better; for you and the board.
Tim Kolacz is based in California, but helps Boards in multiple states. Tim can be reached at 714-264-9912. He is also about to be part of the Hood to Coast relay run in Oregon. Go Puffins!