In a recent insurance coverage lawsuit arising out of an underlying dispute over who was responsible for the lapse of a key man life insurance policy, a court determined that coverage for the attorneys’ fees a management consulting firm incurred in defending against the underlying claim was precluded by the failure to maintain insurance exclusion in the consulting firm’s professional liability insurance policy. Because coverage disputes involving a failure to maintain insurance exclusion are relatively rare, the court’s decision provides an opportunity to consider the exclusion and how it might affect the availability of coverage in certain claims situations.
After the CEO of Old Nassau died, the company submitted a claim under its Key Man life insurance policy, only to find that the policy had lapsed prior to the CEO’s death for non-payment of premium. Old Nassau then filed a lawsuit seeking to hold its insurance broker liable for allowing the policy to lapse. The broker in turn sued Princeton Investment Partners, a management consultant for Old Nassau, seeking to hold the consultant responsible for the non-payment of premium. Princeton ultimately settled with the broker and sought to have the costs it incurred in defending the lawsuit reimbursed by its E&O insurer.
The E&O insurer denied coverage for the defense costs on a number of grounds, including its contention that coverage for the costs was precluded by the policy’s failure to maintain insurance exclusion. Princeton sued the insurer seeking a judicial declaration that the E&O insurance policy covered the defense expenses. The parties filed cross-motions for summary judgment.
The Relevant Policy Language
The policy’s failure to maintain insurance exclusion provided that the insurer “shall not be liable for damages or claim expenses in connection with any claim arising out of, directly or indirectly resulting from or in consequence of or in any way involving: … any actual or alleged failure to effect or maintain any insurance or bond.”
The February 9, 2018 Decision
In a February 9, 2018 decision (here), District of New Jersey Judge Kevin McNulty, applying New Jersey law, held that the insurer was not liable for the fees Princeton incurred in the underlying lawsuit because coverage for the fees was precluded by the policy’s failure to maintain insurance exclusion.
In ruling in the insurer’s favor, Judge McNulty observed that the exclusion contained “no constraining or limiting language” and he said that it was “unambiguous.” The exclusion is “broad enough” to “encompass the failure of a paid manager, Princeton, to ensure timely payments, resulting in the lapse of the client, Old Nassau’s key person policy.”
Judge McNulty rejected the Princeton’s argument that its management consulting services were only incidentally related to the provision of insurance, holding instead that Princeton “had a much more specific managerial role in [the client’s] procurement and maintenance of its life insurance policies.”
After further reviewing the nature of the underlying dispute as well as Princeton’s relationship to Old Nassau, Judge McNulty held that the underlying complaint “falls within the insurance exclusion,” and therefore that Princeton “was not entitled to a defense” under the E&O policy.
This coverage dispute arose under an E&O policy rather than a D&O policy, but the court’s ruling in the case provides an appropriate opportunity to consider the failure to maintain insurance exclusion and what impact it might have under a D&O policy, as well as under an E&O policy.
You don’t see this exclusion in D&O policies very often these days; pretty reliably, the only time I see this exclusion on a D&O policy now is on a policy that has just been renewed year after year without much thought, and the exclusion just got carried along with each renewal – which is of course yet another reminder to have D&O policies reviewed to make sure there aren’t obscure exclusions tucked into the policy that could result in a bad surprise in the event of a claim.
The situation with respect to E&O insurance is a little bit different. The inclusion of this type of exclusion in an E&O policy is also unusual but less so than is the case for D&O policies. The presence of a failure to maintain insurance exclusion in an E&O policy is really class dependent. There are certain classes of business (for example, property managers) where the E&O insurers really want to avoid becoming a backstop protection for the insured’s clients’ insurance. It is always in the policyholders’ interest to try to get the exclusion removed, but in some instances at least some carriers will not remove the exclusion. (I want to stress here that I am not suggesting that anybody did anything inappropriate in connection with the placement of Princeton’s E&O insurance; I have no way of knowing what alternatives were available at the time Princeton’s insurance was placed, or whether coverage without a failure to maintain insurance exclusion was even a possibility.)
Because the exclusion is a little unusual in the E&O insurance context and very rare these days in the D&O context, it may be that some may be unaware of what the exclusion is there for, and what it might represent. This coverage provides a real life example of how the exclusion operates and how it narrows coverage for claims that otherwise would be covered. Because both the exclusion and the relevant circumstances are rare, I wanted to be sure to highlight this case, so that the next time readers run across one of the relatively rare policies that has a failure to maintain insurance exclusion, they will understand what it is there for.
There is another reason I wanted to be sure to highlight this example of the failure to maintain insurance exclusion. That is that I often get questions that have at their root concerns about liability for the failure to maintain insurance. For example, more than once, I have been asked whether directors could be held liable for failing to acquire cyber insurance. I have not seen any claims like this, where a stakeholder files a claim against company officials for failing to purchase or maintain cyber insurance. But the question evidences an awareness of the possibility. If such a claim were to be filed, would there be coverage?
In the current era, where D&O insurance policies rarely include a failure to maintain insurance exclusion, my presumption would be that the claim would be covered (subject to the specific facts and all of the policy’s terms and conditions). However, this type of failure to purchase or maintain cyber insurance claim, even if at this point purely hypothetical, is another example of how the presence of a failure to maintain insurance exclusion could significantly affect the availability of coverage in certain circumstances.
Some time ago, back when this type of exclusion was relatively more common in D&O insurance policies, it became pretty much standard industry practice that the D&O insurer would remove the exclusion upon request and upon provision of a schedule of insurance. That is still pretty much the case. The key, however, is that you have to ask to have it removed. If no one asks, the exclusion will remain on the policy and get carried forward year after year through successive renewals.
A request to have them removed is less likely if the exclusions’ possible effect on coverage or the circumstances in which the exclusions might come into play are not fully understood. All of which underscores the critical importance of having a knowledgeable and experience insurance adviser involved in the insurance placement process.
A February 27, 2018 post on the Wiley Rein law firm’s Executive Summary Blog about this coverage dispute can be found here.
C5 Conference in London in April: C5 will be sponsoring its annual D&O liability insurance conference in London again in April. C5’s 27th Annual D&O Liability conference will take place April 18 and 19, 2018. The conference will be held at the Crown Plaza London- The City Hotel. The conference will offer practical insights on the latest developments and challenges facing the industry, and will also feature a specific cross-industry panel on the role of Risk Managers and the difficulties they encounter when engaging with the Board. I will be speaking on the first day of the conference on the topic of “The Rise of Class Actions: A Comparative View of Class Actions in Europe and the U.S.” The conference brochure can be found here. Readers of The D&O Diary can receive a 15% discount off the conference price. Quote the following code at registration to redeem this offer: D15-999-DOD18.