It can be a challenge, when economic times are relatively good, to take time away from thinking about new opportunities to discuss topics like D&O insurance. Even though I am biased, I’ll admit that, in those times, discussing the risks of potential liability and how to insure those risks can feel both a pretty unpleasant and a pretty remote thing to be discussing. However, like all risk-related issues, it is precisely in those times when business is going well that a little bit of counter-cyclical thinking and attention can do the most good over the long haul.
As you approach your next D&O policy renewal – and particularly in the 30-60 days prior to the expiration of your current policy, there are a few things that you may want to consider.
Multi-year endorsements – what’s the catch?
In good times, many insurers will offer packages styled as multi-year policies, usually touted as an option that allows for some premium savings and perhaps a reduced administrative burden. However, as with all things, these advantages may come with a catch.
Many multi-year endorsements will reserve to the insurer the discretion to assess additional premium on an annual basis within the multi-year period if the risk profile of the bank changes in a material way. So premium savings may not ultimately be realized, depending on the facts.
Beyond this, some multi-year endorsements will actually impose additional requirements on the insured to provide notice of events that could trigger the carrier’s repricing rights or other conditions. Those obligations may be triggered when those events occur on an intra-period basis, which can set up a potential foot-fault for an organization that does not keep those requirements front of mind (which can be a practical challenge, as if those events are happening, it is likely that there are a number of issues competing for management and the board’s attention).
Companies looking at multi-year endorsements should make sure they understand fully the terms on which the multi-year option is being provided and should have counsel or an independent broker review the specific language of the proposed multi-year endorsement itself on their behalf. In addition, while it may be tempting to use a multi-year endorsement to try to extend the renewal horizon and to try to reduce the administrative burden that comes with the renewal process, doing so may also reduce your ability to negotiate appropriate enhancements to your policy terms over the multi-year period.
Multi-year policies may be the right fit for your institution, but they should not be viewed as a one size fits all solution. Before heading down that road, ask yourself how much is being saved and how real those savings actually are and, perhaps just as importantly, whether avoiding a broader discussion of your coverage strategy on at least an annual basis is a good thing or not.
What about the bank has changed?
Times of economic expansion often bring with them opportunities to explore new lines of business. In addition, substantial recent technological innovations in the financial services industries and increasing consumer demands for technological solutions have meant that not only are new market opportunities being explored but that they are being explored in new ways. And if that isn’t enough, there is always the ever-changing regulatory and compliance landscape to contend with.
All of these trends – as well as your decisions of where and how your institution will choose to participate (or not to participate) in them – bring with them new and different risks. To the extent that your bank has expanded its offerings, changed its footprint or portfolio mix, or otherwise changed its policies or ways of doing business, you should think about how those changes may impact your insurance needs. It can be easy, particularly when you have a long relationship with an incumbent carrier, for the renewal process to become somewhat rote.
Be sure that your insurance advisors understand your business, how it has evolved and is continuing to evolve, and what new risks you may be facing as a result, in order to best align a coverage framework with those risks.
Coverage term clarity trails claims activity.
While the last several years have seen most banks return to growth and profitability, the experience for those who were not fortunate to have weathered the storm of the last downturn has been different. FDIC and other litigation often gets quite a bit of press when it is brought, and may also get some once it settles or reaches a judgment. However, the insurance implications of those actions may not become clear for some time after that, and by the time they do, few are watching from the banks’ perspective outside of those directly involved and those of us that practice in the space.
Regardless of the size of the audience, coverage issues related to failed-bank and other litigation, including non-bank D&O actions, brought in connection with some of the events of the downturn have worked their way through various courts in the intervening years and, in some cases, have resulted in interpretive rulings on the scope and applicability of particular coverage terms. Depending on your jurisdiction, courts may have considered things such as how broadly or narrowly particular insured vs. insured language should be applied, how professional services exclusionary language should be interpreted, how specific the contents of an effective notice of claim must be, what it means for a notice to be timely, at what point a particular conduct exclusion may attach, and various other issues.
And your insurer has been paying attention.
Insurance forms and endorsements routinely evolve over time to address changes in the law (or to anticipate changes based on trends in other jurisdictions) or to address ambiguities that may arise based on particular facts that have come out in other claims. However, those evolutions (particularly where favorable to an insured) may or may not make their way into policies as rapidly as they should, and unless you, or your counsel or broker on your behalf, bring these issues up during the renewal process, another renewal may pass without potential scope of coverage issues being appropriately addressed.
As favorable market conditions begin to turn and risks become more pronounced, the balance of negotiating leverage will shift, which will likely be reflected not only in less favorable premium pricing but also in a reduced willingness of insurers to be flexible with policy terms or to provide coverage enhancements. Take the time to be deliberative about your coverage strategy and to address some of the issues raised by the last downturn when times are good. Hopefully, it won’t ever be an issue and you will never have to contend with a claim. But if risks actualize to the point where you do find yourself dealing with a claim situation, you will be thankful that you took the time to engage in a little counter-cyclical thinking