December 15, 2010

Credit Union Management magazine’s new Web-only “Insurance Matters” column runs the third Wednesday of each month.

Your credit union directors’ and officers’ insurance is unlike most other liability insurance policies.

“Normal” casualty insurance policies (general liability, automobile, workers' compensation) pay for events that occur during the policy period. These are called “occurrence policies.” For example, an auto insurance policy will pay for an accident that occurs while the policy is in force. You could cancel your auto insurance the day after the accident and still be covered.

D&O policies, however, pay for lawsuits filed during the policy period; the wrongful act could have occurred years before. So called “claims-made” policies respond only when a suit is filed or when a strong threat of a suit exists.

Difference between Claims-Made and Occurrence
Claims-made policy: pays based on the date of the lawsuit.
Occurrence policy: pays based on the date of the accident or occurrence.

The downside of a claims-made policy comes if the policy is cancelled.

Example: A D&O policy is put in force Jan. 1, 2007, and is renewed in 2008, and again in 2009. In 2010, however, the credit union decides to end the coverage, as the premium has increased. Six months later, a letter from an attorney arrives announcing a lawsuit for discrimination in hiring that occurred in 2009. Bad news: no coverage. Although the policy was in force at the time of the alleged discrimination, the policy was not in force when the suit was filed.

While most credit unions would not think of cancelling their D&O, your insurance company might give you no choice. You might move your insurance from one insurer to another. You might find your credit union in the midst of a merger or acquisition. Any time the insurance is changed, there is the potential for problems with a claims-made insurance policy.

Extended Discovery Period/Tail/Reporting Period
To overcome the above, your D&O policy includes a provision that allows you to extend the period where claims can be reported beyond the end of the policy for events that took place prior to expiration/cancellation, but for which no claim has yet been filed. This is called a "tail" or "extended reporting period" and is only executed (and paid for) when you need it.

Retroactive Date
Claims-made policies respond to claims brought during the policy period as long as the occurrence (the date of the wrongful act) takes place after the "retroactive date." When changing insurance companies, it is vital to understand the new policy retro date. The use of a "tail" may be necessary on your old policy if the new policy retro date is not sufficiently in the past.

Pending and Prior Litigation Date
Many insurers now are offering policies to new insureds that have no retroactive date. They cover all prior acts when there has not been litigation. The pending-and-prior date will be the date of the new policy. Such policies recognize that you had D&O insurance before, but that you may not have known you had an event coming up that was going to hit you as a claim.

Questions for Your Insurance Agent Regarding Your Claims-Made Insurance Policies:

• Does our current policy provide coverage for any acts prior to the inception of the insurance policy?

• Can our insurance company cancel our policy in the middle of a policy period?

• Can we buy an extended reporting period when we need it, at our option, or only when the insurance company cancels the policy?

• What are our options as to the length of the reporting period? (Most policies only allow a one-year extension. Ask about having the policy extended to allow for a two- or three-year extension.)

Scott Simmonds, CPCU, ARM, CMC, is the unbiased insurance guy, consulting on, but never selling, insurance. His credit union Web site is www.CUinsuranceConsultant.com. Simmonds welcomes questions from readers. He will attempt to answer as many as possible in future columns.