what is pre-claim coverage or look back coverage in D&O insurance?

What Is Pre-Claim Coverage in D&O Insurance?

Pre-claim coverage in directors and officers insurance (D&O) provides protection for your business prior to an official claim.

For example, Coinbase, the largest U.S. cryptocurrency exchange, recently received a Wells notice indicating that it might be sued by the Securities and Exchange Commission (SEC

A Wells notice and other “informal investigations” or inquiries by administrative or regulatory agencies, such as the SEC and DOJ can cost real money without ever fulfilling the definition of a “claim”. 1

If your D&O insurance covers pre-claim costs, this reduces your exposure to informal investigations and their associated legal costs. 

The following steps can help you determine if your carrier will pay for the costs incurred in an informal investigation… 

What Is A Pre-Wells Investigation or Informal Investigation?

An informal investigation is sometimes referred to as a “pre-Wells” investigation. 

The term pre-wells comes from the term “Wells notice” which is a notice from a federal, state or local investigative authority that you may be under investigation.

A Wells notice is a formal request for information, documentation or testimony about a financial matter… Any pre-Wells investigation is an effort to determine the nature of certain actions that “may have occurred” or “possible violations” by an insured.

Of course, when you receive a notice from the SEC you need to respond…

But before you respond, what will you do? 

You will call your attorney for guidance and advice about what to do next… 

During the informal investigation, you and your company and your attorneys may be allowing the SEC to review your company’s books, producing records and making individuals available for inquiry.

This type of investigation may take weeks, months or even years, without ever leading to a Wells Notice or a formal investigation or charges…

Dealing with an informal inquiry is not only disruptive to your business, but the process can be expensive and generate significant legal bills.

What Is D&O Pre-Claim Coverage?

Depending on how your D&O policy is written it may or may not cover pre-claim fees.

Indeed, D&O insurance will often not cover the costs related to pre-claim inquiries if they do not fulfill the formal definition of a “claim” in your insurance policy.

Your D&O policy may also only trigger coverage in the event of a “wrongful act” by an insured.

However, pre-claim coverage, also known as “lookback” coverage, provides reimbursement of costs and legal expenses prior to a formal investigation or “claim”.

In the event of an informal investigation the insured must notify the carrier of an investigative matter, even when that matter does not (yet) fulfill the formal definition of a claim…

Then, if and/or when that matter becomes an actual claim the insurance company will “look back” to the notice of the informal claim as the date when the clock started ticking on reimbursement.

What is D&O Tail Insurance?

D&O tail insurance, also known as an “extended reporting period” or “ERP”, is a type of insurance endorsement that can be added to a D&O claims made insurance policy.

D&O tail insurance is usually added to a company’s D&O policy during a time of transition for the company or its executives. Such as if you are planning to retire or the company is being sold or wound down, etc.

Unlike pre-claim coverage for D&O, a tail insurance endorsement is commonly added to a D&O policy to extend the period of time that a claim may be filed for an incident that occurred during the policy period, but prior to the policy being canceled or non-renewed.

D&O policies may include a brief extended reporting period of 30 or 60 days… However, more D&O tail insurance is purchased by a company as an endorsement that will extend the reporting period for the claims made policy for an additional year or two or five years.

The D&O tail insurance endorsement may be one time or renewable, and these are questions you should talk to your broker about.

D&O Coverage Questions

The following are some high level things you can do to determine if you have pre-claim coverage in the event of an informal investigation:

  1. Check Your D&O Policy: Check your D&O policy for language regarding pre-claim coverage. Read the definition of a “claim” in your policy.
  2. Check for “Wrongful Act”: Check to see if your coverage includes a trigger requiring a wrongful act.
  3. Read the Definition of an “Insured”: It makes a difference whether your company or officers are named in an informal or formal investigation… Is your company an “insured” under your D&O insurance policy, or are just directors and officers considered “insureds“.
  4. Time period: Is there a time period defined for “look-back” coverage? For instance, if pre-claim coverage does exist, does the “look-back” period have a stated limitation (eg. 12 or 24 months)?
  5. Related Entities: Does your policy include a trigger for informal investigations of a related entity? If you are a real estate private equity company, a VC or hedge fund, your company could be caught in a net by an investigation into one of your company’s portfolio companies, subsidiaries or affiliated funds… As such, is there related company coverage?

These are just a few items to consult with your broker on your D&O policy terms and conditions.

If you have questions about D&O coverage schedule an appointment with me or give me a call at 203-200-0445.

I would be happy to talk or meet with you to talk about it.

Footnotes

  1. In other words, an informal claim may eventually become a formal claim but pre-claim costs may not be covered.
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