When is the Right Time to Change Insurance Carriers?

One of the trickiest decisions to be made at the time of your D&O insurance renewal is whether to move to a different carrier than the one with whom you've been working. My partner Norman Allen, an expert in D&O insurance as well as Woodruff Sawyer's San Francisco Management Liability Practice Leader, walks through the issue in his guest post this week.  –Priya

There are myriad reasons for a company and its directors and officers to develop a trusted, multi-year business relationship with the D&O carriers on their insurance program. A strong relationship with a company's insurance carriers—especially the primary (first layer) insurance carrier—is particularly helpful. Among the more obvious reasons:

• A trusted partner is more likely to try to work with you when situations change, be it in the market itself (think: pricing, self-insured retentions) or in your risk profile (think: lawsuits, financial distress, or business turnarounds).
• When an insurer works with you for multiple years, they build up some premium "in the bank," which makes it a bit easier for underwriters to justify better terms.
• A long relationship allows the company's management to get to know the carrier's claims representatives in calm times, which makes working together in times of chaos easier.
• Having the same carrier on both sides of an insurance renewal date lessens the chance for a claim to fall into a gap between the two carriers' policy forms.

For these reasons, savvy insurance brokers encourage their clients to stay the course with incumbent carriers, except in exceptional circumstances. Still, occasionally the time is right to break up with your insurance carrier––or for them to break up with you.

Why Break Up?

It might be time to break up because of a dramatic change in a particular carrier's risk appetite that sets it apart from others in the market. For example, maybe your primary market has decided to significantly raise prices, reduce its exposure to certain industries, or re-allocate its capital to other lines of insurance. Or maybe your carrier's management has changed or its claims team has changed and the word on the street is that the change isn't a positive one for its clients. Maybe it's you and not them: your company has changed dramatically; for example, by pivoting into very different businesses or models, as a result of marked changes in market capitalization, or perhaps by going public.

Break-up Pre-Work

Whatever the reason, when you are in the situation of changing carriers, there is significant pre-work to be done to ensure that your D&O insurance coverage remains robust.

First, recognize that no two carriers have exactly the same policy language, so some gap––or difference––in coverage is inevitable. For example, some carriers may have slightly different definitions of claim triggers or different triggers for exclusions. You should expect your skilled insurance broker, many times working with your outside counsel, to point out these differences so that any trade-offs you make are made knowingly.

For D&O insurance, the concept of continuity of coverage is also important. Because D&O policies are "claims made" insurance policies, the insurance contract that is in force at the time a claim is made is the one that will respond to that claim, even if the alleged wrongful acts occurred before that particular policy was put in place. It's important that coverage be continuous from one policy year to the next so that those prior acts can still trigger insurance coverage. Thus, ensuring continuity of coverage from one carrier's policy form to the next carrier's policy form is imperative. For example, in a public company D&O policy it's important to:

• avoid signing a warranty as part of moving to the new carrier;
• avoid adding a prior acts exclusion; and
• match retroactive dates, Prior & Pending Litigation Exclusion dates, and other Continuity dates.

There may be times when a company's situation makes it difficult to obtain all these elements of continuity, but in the vast majority of circumstances in today's marketplace, they should be achievable. When they are not, it is especially important that the insurance broker and outside counsel map out the pros and cons of changing carriers, and the advantages of one carrier over another. It may still be necessary to change, but change should be made with eyes wide open.

Finally, if changing carriers becomes necessary, it is prudent to inquire broadly within your company about any incidents or matters that might already be a claim for which the carrier has not been provided notice. Or, for anything that might not yet be a claim but reasonably could be foreseen might give rise to a claim. You should discuss all such matters with your broker, and likely outside counsel, in order to determine when and how to provide notice to your insurance carriers well before the expiration of the expiring policy. It may be necessary to provide notice before moving carriers. A thorough inquiry of possible matters may help you avoid missing out on the opportunity to get insurance coverage for a matter, and at the very least avoid a prolonged fight with one or more carriers over who is responsible for paying the claim.