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Renewal blunder means big trouble for board of directors

Sat Mar 21st, 2015 on     Insurance Claims,    

In our January series about understanding insurance policies, we focused on homeowners insurance and threw in a little auto coverage now and then. Our reasoning was simple: More people are likely to have a claim under one of these policies than their other non-health insurance policies. Start big, then narrow your scope: When you know what to look for in a homeowners policy, chances are good you will be able to find the important information in any other policy.

Of course, if you don’t understand what you’re reading, it doesn’t make a difference. Nor does it make a difference if the person you’ve assigned to understand the policy is equally at sea. One company’s board of directors discovered this the hard way.

Companies carry directors and officers coverage in the event of a claim against the company relating to a governance issue. Say the board approves an investment strategy that winds up costing the shareholders a lot of money. If the board acted negligently, recklessly or with malice, the directors could be personally liable for any damages. With D&O insurance, the insurer agrees to provide legal counsel, to defend the directors and to pay any damages (up to the coverage limit) awarded to the plaintiff.

Imagine how surprised the members of a Canadian company’s board were — not from Florida, but the same principles apply — when a claim was filed against the entire board and they discovered their D&O policy had been canceled. It wasn’t even an unusual set of circumstances, it seems. It was just a big blunder that could cost the directors a lot of money.

Companies come and go every day. They dissolve; they merge; they take over or are taken over. In this case, the company was winding down after being sold. The company that this particular board of directors controlled was no longer doing business when the D&O policy came up for renewal. The controller let the policy lapse.

A few months later the board members learned of the claim. And they soon learned more about claims-made policies than they ever thought they would have to know.

We’ll finish this up in our next post.

Source: Insurance News Net, “Directors of Company Find No Insurance Coverage in Place When Lawsuit Commences,” March 20, 2015

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