Concerns in Layering D&O Insurance Policies and Excess D&O
Unlike many other kinds of insurance, building towers to achieve large limits in D&O is commonly done by layering insurers, and their capacity, one on top of the other. Large limits in other lines can easily be built on a ‘quota-share’ basis, where one ‘lead’ insurer and policy wording is determined (this insurer usually provides the primary claims-adjusting but the other insurers will make sure they are part of this process, and third party adjusters can also be pre-determined) and other insurers take a percentage of the overall policy limits. Yes this can be done in Canada, and can even be done with Canadian insurers and with D&O policies. The caution about quota-share policies, is that it is more difficult to maintain continuity of coverage, which is paramount in D&O.
Back to layering D&O: due to budgeting, corporate growth and new exposures, this may be done over the period of many years. If you are one of the (declining number of) insurance buyers who have maintained your primary insurer (the first layer of insurance excess of your deductible/retention) over many years, and you have not signed any warranty statements since the original inception of coverage, then you deserve some comfort about your continuity of coverage. However, this continuity is likely only achieved within the limits of liability of your primary policy. Subsequent new policies, which attach excess of the primary policy, don’t likely provide the same continuity as the underlying primary, or even lower excess policies. Therefore, summaries of your insurance program should always highlight the continuity provisions of the program. However, continuity of coverage cannot be determined by the ‘continuity date’ provided on some, but not all, insurers’ declarations pages of the policy. Continuity may be most simply defined as coverage for ‘past acts’. It is a multifaceted provision in the D&O policy or program ( I won’t take the time to explain it in detail here), and is a product of each and every warranty statement (passive or aggressive) provided to any insurer, all prior or pending litigation exclusions, prior circumstances exclusions, past wrongful act exclusions, (such exclusions may not be obvious as they may be built into applications, definitions, exclusions, endorsements and excess policy wordings)and any gaps in coverage or changes in insurance carrier. And continuity is directly affected by the severabilityprovisions and exclusionary language in each layer of coverage.
There is a great blog posting (here), in one of the highest authority D&O blogs I have found called dandodiary.com (here), written by Kevin LaCroix, and it provides a great, unfortunately not Canadian, case example involving continuity and severability concerns in a D&O tower and the lack of true ‘follow-form’ coverage from excess insurers. We, in Canada, do have our own case law, raising similar issues and precedent setting decisions, (see Hanis v. Teevan, 2008 ONCA 678 for duty to defend, see Trisura Guarantee Insurance Co. v. Belmont Financial Group Inc. (2008) N.S.J. No. 436 for warranty statement misrepresentation, and Boland v. Allianz. Ontario Court of Appeal for knowledge of circumstances) but unfortunately, I have not found them all in one case, or with a wonderfully detailed review and discussion of the case (provided by someone else.)
If you would like to learn more about layering D&O policies and follow-form excess policies, or about continuity, severability and hidden exclusionary language and where they can be found in your program, please call me directly.
Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626, gshields@mitchellsandham.com
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