600 1455 West Georgia Street, Vancouver, BC V6G2T3 T 604.731.5328 F 604.731.3137 axisinsurance.ca Technology E&O Insurance Claims and Reporting Axis Insurance Managers pride themselves on offering the very best customer service. Not just when we re talking to you about gaining your business, but when you are a client, and even more importantly, when you have a claim. And this is never more important than when you ve chosen an insurance policy that can be complex and tricky to understand like Errors and Omissions (E&O) Insurance. The claims procedure for E&O is different from other insurance policies, and E&O Insurance for Technology Companies has many distinct quirks that are important to know. That is why we have prepared this brief report to help guide you in your obligations under the policy and explain the important points and potential coverage issues. If you have any more questions or would like more information then please contact your service representative who will be able to help.
Table of Contents Exectutive Summary...1 What s Different about E&O Claims for Technology Companies... 2 Notice of Claim... 2 What Constitutes a Claim?... 3 Who is Insured?... 3 Notice of Circumstances... 3 Extended Reporting Options... 4 Giving Notice to the Insurer... 4 Late Reporting... 5 Retroactive Dates... 5 Cancelling or Lapsing Coverage... 6 Warranty Statements... 6
Executive Summary Claims or notification of circumstances must be reported promptly. If the insurer feels that their position has been prejudiced by late reporting there could be grounds for denial of the claim. Any costs that you have incurred prior to reporting the claim may not be covered. The E&O policy describes the Insured as the Organization and all directors, officers and employees and knowledge of one person may impact the coverage available to the Insured. The sad truth is we have seen numerous claims where the Insured has prejudiced their position or rights of recovery for amounts they had already incurred without the insurers consent, by late reporting. This often happens when Insureds proceed with legal counsel and do not keep the financial managers of the corporation fully informed. In addition financial managers don t always know that a director or an employee has become aware of circumstances that should be reported under the policy. It is therefore our recommendation that directors, officers and employees are made aware of policy reporting conditions and report any circumstances that they believe could give rise to a claim, and especially any notice or demands that have been received whether orally or in writing. Moving your insurance from one insurer to another at renewal can potentially create a gap in coverage if a claim has been received but not reported. Before you move your insurance from one insurer to another you should carefully check policy conditions and/or be sure you are not aware of any notice, demands or allegations that could constitute a claim under the policy. Be sure to discuss any potential for a claim under the policy or the possibility of circumstances developing into a claim with your Axis service team. This is particularly relevant if any legal advice is being sought. 1
What s Different about E&O Claims for Technology Companies? Unlike General Liability policies, the E&O policy is a claims made rather than an occurrence based policy. This means that the event that causes you to claim on the policy (the coverage trigger) is the date on which a claim is first made against you, regardless of when the underlying act, error or omission happened. Some applications contain warranty statements which ask if you are aware of any circumstances that could give rise to a claim. The Commercial General Liability policy, on the other hand (which covers claims resulting in bodily injury and property damage) is more typically issued on an occurrence basis. Therefore, it doesn t matter when you get sued, or when allegations are made against you, as long as the policy was in force when the occurrence took place (for example, when a slip and fall actually happened). This means you could be sued years after the policy has expired, but as long as the policy was in force when the occurrence took place you will be covered. With E&O, a claim (as defined in the policy) results from allegations made against the insured arising out of an act, error or omission. The important point is that it does not matter when the act, error or omission took place (as long as it happened after any retroactive date specified in the policy) because the policy which is in force when the allegations are first made against you will apply. If ever you let your policy lapse you are no longer protected by the policy, regardless of the number of years you have been purchasing the coverage. There are extended reporting options available for purchase for an additional length of time (please see Extended Reporting Options below). In the event of a claim the policy has strict conditions about how you must give notice of the claim to the Insurance Company. These conditions can influence your right to coverage under the policy so it is essential that you clearly understand your obligations in the event of a claim. Notice of Claim Your policy may be a Claims Made policy or a Claims Made and Reported Policy. The difference is simply that under the Claims Made and Reported Policy (which is more restrictive) the claim must be reported to the insurers as soon as practicable, but in no event later than the last day of the policy period. The Claims Made form also states the claim should be reported as soon as practicable but allows for reporting after the policy has expired hence broader scope in cover. Some insurers opt for a hybrid approach using language such as Continuous Coverage. These policies allow you to report after the policy period but only if the coverage has been renewed with the same insurer. If the coverage is replaced with another insurer there may be a gap in coverage if a claim is not reported before the end of the policy period. 2
It is important that you understand the type of policy you have along with the policy coverage triggers and that you are aware of any potentially unreported claims (or circumstances that may give rise to a claim), especially at renewal time. What Constitutes a Claim? Under the E&O policy there are conditions that set out what a claim constitutes. These conditions state that there must be allegations against you which demand monetary or nonmonetary relief (defined in the policy), and most polices state that such demands must be made in writing. This would typically mean a law suit seeking compensation for damages but could simply be a letter from your client demanding monetary compensation. However, some policies are broader adding cover for regulatory, criminal and other types of proceedings. Although not typical, some policies broaden the definition of claim to include oral demands. This may be an advantage in certain situations but caution should be taken when dealing with allegations that are oral in nature as they set the clock ticking earlier than a written demand. And if the allegations are not reported to insurers promptly, it creates the potential for insurers to say that their position has been prejudiced as the obligation to notify has already commenced. Who is Insured? Most policies have a broad definition of who the insured is, which includes the Organization, as well as its Directors, Officers and Employees. The requirements to notify applies to all Insureds, so if an employee has received a written demand for monetary compensation it should be reported to the insurer. Broader policies may limit this obligation to knowledge that has come to the attention of a senior executive officer. It is an important issue because an employee who suppresses knowledge of a problem that could be considered a claim under the policy may prejudice your right to recover under the policy. Notice of Circumstances When you sign an application form for insurance there are questions relating to prior claims and known circumstances that could result in claims. 3 Another feature of the policy is the ability to put the insurer on notice of circumstances that might result in a claim. There are strict rules that govern such notice and policies differ from one insurer to the other. The basic point is that although you may not have received a demand, you might be aware of specific circumstances that are likely to lead to a claim in the future. Once the circumstances are reported to the insurer in accordance with the policy terms, and accepted by the insurer in writing, any claim that subsequently results from those circumstances will be covered by the policy. Please see the Giving Notice section below. Extended Reporting Options
Under the E&O policy there is an Extended Reporting Period (ERP) automatically built in. The ERP (if exercised) provides the insured with one year to report any claims made against them, for wrongful acts occurring prior to the inception of the ERP. The option is exercised by the payment of a predetermined additional premium (usually a cost of between 50% and 200% of the annual premium applies, depending on the insurer and the specific policy conditions). Unless there are extenuating circumstances or the insurer refuses to renew the policy it is usually more economical to renew the coverage. When a policy is renewed there is no limitation on when the wrongful act takes place. Therefore choosing an ERP would usually only be an option if your existing insurer is refusing to renew the coverage or if you have no other coverage options. If ever you let your policy lapse you are no longer protected by the policy, regardless of the number of years you have been purchasing the coverage. Giving Notice to the Insurer The application is one of the most important aspects of E&O insurance and most insurers require an application form at each renewal. Some applications contain warranty statements which ask if you are aware of any circumstances that could give rise to a claim. As you would expect, an insurer may not want to provide cover if you state you are aware of circumstances that could give rise to a claim under the policy, so the E&O policy includes provisions that allow you to put the insurer on notice if you are aware of circumstance that may result in a claim. There are conditions relating to what acceptable notice constitutes, but if the notice is accepted any claim that develops from such events notified to the insurer will tie any future claims to the policy period during which the circumstance was reported and therefore provides certainty about which policy will govern the claim. Usually you will have to provide specific information regarding the issues and circumstances in order for the notice to be accepted. This would include information such as the names of parties involved, dates and the circumstances of the alleged wrongful act. Unsurprisingly, you are not allowed to laundry list or just issue blanket statements in an attempt to embrace any possible claims that may come along later. 4 However, if something happens that you can reasonably expect to turn into a claim under the policy, but it does not yet meet the definition of a claim; it is probably in your best interest to report it to the insurer. It is important to remember that when providing notice of circumstances, acceptance by the insurer of such notice will secure coverage under the policy for any future claims that develop from those
circumstances. However, the insurer s acceptance of the notice is not a coverage opinion and it does not automatically mean that by accepting notice there is coverage under the policy. The insurer will reserve their rights to explore the circumstance and issue a coverage opinion, which will follow after the claim has been reported. Although this is a benefit to you, some insurers may make it a condition that you must report circumstances that you believe may result in a claim as a soon practicable and within the policy period. We would prefer policies that grant you this right, not the obligation but nonetheless you should be aware if this is an obligation in your policy. Late Reporting You should keep in mind that any costs that are incurred before you give notice to the insurer may not be covered by the policy. This is especially so if the insurer feels their position has been prejudiced as a result of late reporting. In other words, the two risks you face by not reporting claims in a timely way are that the claim could be denied entirely or that all the costs already incurred are not covered - even though future costs may be covered. There are several reasons for late reporting of claims which are useful to be aware of. Perhaps the most common is that the Insured involved does not recognize that the incident in question may be covered under the E&O policy. Another reason, which is related to the first, is that the director or officer affected does not deal with insurance issues (which are often handled by someone else in the organization) and is therefore not aware of the reporting conditions. Finally, Insureds often believe the issue will be resolved or will eventually settle for a minimal amount. This can be a risky approach because if the matter isn t settled, you may be denied coverage if the insurer feels their position on the claim has been prejudiced. Therefore it is vitally important to report claims in a timely and prompt manner. Late reporting of claims can cost your business a lot of money. And apart from the cost, there is the time, stress and aggravation of dealing with an uninsured matter and possibly even litigation against the insurer. What are Retroactive Dates? Claims that relate to acts, errors or omissions that occurred before the retroactive date in the policy are not covered. This applies even if the claim is made against you during the policy period. The retroactive date is usually the date that coverage was first purchased and most policies will contain a retroactive date. If you move your insurance from one insurer to another, it is important to maintain (wherever possible) the original retroactive date. Some insurers will move the retroactive date forward making it the inception date of the new policy. This is very detrimental as you should try to maintain complete continuity of coverage. 5
Cancelling or Lapsing Coverage In the event that your policy is lapsed (non-renewed) or cancelled there are important considerations. Firstly, due to the claims made nature of the policy, you will no longer have coverage for any suits or allegations made you against after the coverage has lapsed, even if the act, error or omission occurred while the policy was in force. If you believe that there is a likelihood of a suit developing from a particular known circumstance you should put the insurer on notice before the policy expires, as previously described. If there are no particular circumstances however you are still concerned a claim may develop in the future you should consider purchasing the extended reporting period, being careful to do so within the time frame permitted by the policy. You should also check, by canvassing your directors, officers and employees to make sure that there are no known or unreported claims. Any circumstances that come to light should be immediately reported to the insurer. Warranty Statements When you sign an application form for insurance there are questions relating to prior claims and known circumstances that could result in claims. These are referred to as warranty statements and they should be carefully considered prior to answering. In effect the insurer is trying to make sure the house is not on fire before they commit to coverage. Answering NO to these questions could result in a claim denial if it is later established that you in fact were aware of unreported claims or circumstances. These questions should not be answered on renewal applications unless absolutely required by the insurer. To find out more about E&O Insurance for Technology Companies, or to discuss your existing insurance policies, please call one of Axis Insurance s professional and experienced team members at 604.731.5328 or email info@axisinsurance.ca. We would also be pleased to outline the benefits of D&O Insurance with your management team or board members. 6