It is rare to find a Management Liability (“ML”) product that has been created from scratch. As a consequence of the typical ‘pick and mix’ approach, there can be inconsistent definitions and understandings of some of the key concepts. “Continuity” is one such area, aided and abetted by that patchwork approach to policy engineering, but it has long been a critical characteristic and feature of ML products, with particular relevance to Directors & Officers Liability (“D&O”).
In broad terms, the concept of continuity is to use a variety of architectural levers to attempt to determine which specific insurance policy should apply to a given claim. This is vital, because it is never the intention for more than one policy to be triggered in a claims made environment. It is equally as important to make sure that continuity of cover is not broken and a claim allowed to fall into a gap as a potential uninsured loss if cover is moved between insurers. Continuity can also enable underwriters to discriminate amongst exposures so they can seek to provide cover for certain aspects of risk, whilst not covering others. Key amongst these instruments is a prior acts date, more commonly referred to as a retrodate (retroactive date to be more precise). This is often confused with the ‘prior and pending date’ which is a connected, if almost entirely separate, concept.
Prior Acts/Retro(active) Date
This goes to the heart of continuity because it provides a ‘bright line’ break in cover as of a specific date. It is set at the date on which cover is excluded for prior behaviour(s) (or “wrongful acts” in policy language terms). Claims made during the applicable policy period that result from conduct that pre-dates the prior acts/retro date are not covered. In theory, this constitutes a dramatic restriction in cover. Very few policyholders would consider this to be a sensible option when considering whether or not to move cover from one ML/D&O provider to another. For obvious reasons, underwriters consider this attractive, but retrodates are not generally a feature of ML/D&O wordings, save for three possible scenarios:
1) if a policyholder has undergone a major change of management, and the replacements (or the underwriter) wish to insulate themselves from the behaviours of the predecessors;
2) if ML/D&O cover has not been purchased previously, and the underwriter does not wish to cover past activity and behaviours;
3) there has been a change in ownership and a consequent change in the insurable interest of the management group following this event, which is separate and distinct from that which went before. The textbook approach here is to buy/consider run off cover, and pick up the go forward risk with a prior acts/retrodate.
As important as it is to make sure that the period of cover for ML or D&O risks is not broken (i.e. it is ‘continued’) and that policies do not ‘stack’ for the same claim, it is equally as important to ensure that underwriters do not accept risks where claims are already in motion. Two mechanisms exist to manage this. The first is through exclusions which (broadly) stipulate that there is no cover for claims that have been previously notified to another policy. Developed generosity of language does help here, with a typical example below (the key piece underlined), and this reduces the chances of gaps developing. Policy sophistication is important though, as not all ML/D&O forms are identical:
“The Insurer shall not be liable for Loss on account of any Claim based upon, arising from, or in consequence of any fact or Wrongful Act forming part of circumstances or of a Claim of which written notice has been accepted under any policy which this Policy renews, replaces or follows in whole or in part;”
The second mechanism is the Prior & Pending (“P&P”) Litigation Exclusion
As the name suggests, the purpose of this exclusion (example below) is to exclude cover for prior or existing litigation. The premise is that ML/D&O insurance is never intended to apply to existing matters and problems, it is meant for future suits and proceedings (which can of course be for wrongful acts or behaviours committed/allegedly committed in previous years). Standard market practice is to backdate the P&P exclusion date to the date on which the policyholder first purchased cover, and from when they have renewed without interruption:
“based upon, arising from, attributable to or derived from substantially the same facts or circumstances alleged in, any pending or prior proceedings of any nature against any Insured or Outside Entity commenced before the date stated in the Schedule;”
Again, language matters here, and note that the litigation needs to involve the insured, not just any litigation in general. The true effect of backdating the P&P date is that it allows claims made during the new policy period to be covered when they arise out of pre-existing issues or litigation which have not yet developed into a claim. Conversely, a ‘fresh’ P&P date would potentially allow the insurer to exclude such matters. When ML or D&O cover moves between insurers, the P&P date should not therefore reset. The interchangeability of ‘continuity date’ and P&P date is down to this skintight association.
It is still important to be clear on what backdating the P&P date will not do:
- it would not allow cover for existing claims which have been noticed to a prior insurer; and
- it would not pick up any other claims made against the insured prior to the current policy period, as the claims made trigger requires the claim be made during that policy period.
One final point to note is that where litigation is known to exist, or claims have already been accepted, it is common to see ‘specific matters’ exclusions. These are often ‘avoidance of doubt’ endorsements and should not always be viewed with suspicion, as the sophistication of modern policy language should comfortably allocate the notification/claim to the correct place. As a consequence, these tend to be much less prevalent than they once were.
