We all know when we have had an auto accident. A fire is a clear indication of a property claim. But when do you report a claim under your directors’ and officers’ or employment practices insurance policies?
What is a Claim?
Here are the definitions of a claim under one insurer’s contract:
“Claim” means a director and officer claim, an entity claim, an employment practices claim, a lenders’ liability claim, a securities claim, and a trust department claim.
“Director and officer claim” means a demand or proceeding against a director or officer for a wrongful act other than an employment practices claim, a lenders’ liability claim, a securities claim, or a trust-department claim.
“Employment practices claim” means a demand or proceeding against either a director or officer, or the company (if so indicated on the declarations) for a wrongful act in connection with any actual or alleged:
– wrongful refusal to employ a qualified applicant for employment;
– wrongful failure to promote a qualified employee;
– wrongful demotion, negligent evaluation, negligent reassignment, or wrongful discipline of any employee;
– wrongful termination of employment, including retaliatory or constructive discharge;
– harassment, coercion, discrimination or humiliation of an employee or applicant for employment as a consequence of race, color, creed, national origin, marital status, medical condition, gender, age, physical appearance, physical and/or mental impairment, pregnancy, sexual orientation, or sexual preference; or
– oral or written publication of material that slanders, defames, or libels an employee or violates or invades an employee’s right of privacy.
“Entity claim” means a demand or proceeding against the company (if so indicated on the declarations) for a wrongful act other than an employment practices claim, a lenders’ liability claim, a securities claim, or a trust department claim.
The D&O policy deals with claims against the directors, officers, and entity (the bank) for “wrongful acts.”
Here is the same insurer’s definition of wrongful act:
“Any actual or alleged act, error, neglect, omission, misstatement, misleading statement, or breach of duty which shall have been committed or attempted, or which shall be alleged to have been committed or attempted. …”
The policy goes on to say that claims must be reported to the insurer as soon as “practicable.”
When Should a Claim Be Reported?
The easiest way to look at claim reporting is the following:
Have you been sent or given a notice of a hearing, trial, or administrative proceeding for an act that may be covered by your insurance?
Have you received a notice demanding compensation for a wrongful act?
If the answer is yes to either of the above, report the claim. This means that an attorney’s letter stating that his client was fired unlawfully is a claim, and must be reported to the insurer. A notice from your state’s Equal Opportunity Board is a claim. Formal notice of a lawsuit is also a claim.
Review the definition of “claim” in your policy. Does the allegation have to be in writing?
Some insurers’ definitions of a “claim” require that the notice be in writing. The above policy does not. A customer who walks into your office and demands $10 K, alleging that a loan was improperly refused, is (under the definition above) a claim.
Failure to report a claim in a timely fashion can result in the insurance company denying coverage. In most cases, there is little reason to delay the reporting of a claim.
Notice that the above doesn’t address the issue of claims under your deductible amount. Most banks have deductibles well over $50 K. Many of the allegations made against financial institutions are under the amount where insurance steps in. If there is even the slightest chance that the claim (payment to the claimant and defense costs) may exceed the deductible, my advice is to report it.
Some insurers want all “claims” reported. Others only want to hear if you exceed the deductible. Work with your insurer to establish an understanding of what should be reported.
How Do You Report a Claim?
Most insurance policies will have a specific section dedicated to claim reporting. There will be a specific address, phone number, and fax number where you send a description of the allegations and the documents the claimant (or his attorney) presented to you.
Attorney Selection
Recalling my comments earlier in this book, each insurer has his own policy terms and conditions. The issue of selecting an attorney to assist in a claim is no different.
Under most bank directors’ and officers’ insurance, you will select your own attorney with your insurer’s approval. Some policies will have a list of approved attorneys. You usually are still able to submit your own attorney for use.
Claim Settlement
Most policies do not allow the insured to settle claims without the approval of the insurance company. The result of such action is a claim that the insurance company won’t pay.
It seems to happen often in the banking world. A customer is “injured” by some action taken by the bank — loan turned down, improper allocation of funds to an account, an embarrassing check refusal — and the bank president decides to “do the right thing.” While such action may be ethically correct, it also may jeopardize coverage under the bank’s insurance.
Most insurer D&O claims staff are professionals. Due to the complexities of these claims, many of the adjusters are attorneys. Most of them welcome calls from an insured (and consultants, fortunately).
Take a moment and talk with your insurer before you offer a settlement — even on a small claim.
