The importance of reviewing Insurance Coverage: Onerous Exclusions & Clauses

We were recently appointed by a Management Consultant to act as their insurance broker. On review of their Directors & Officers (D&O) insurance policy it transpired that they had renewed with the same insurer via the same broker for several years.

Following discussions with the client and a thorough review of their D&O insurance documents, it soon transpired that several onerous exclusions had been applied by their current insurers at each renewal, which had never been properly explained to the client and challenged by their broker to their underwriters.

One such onerous Clause included an Insolvency Exclusion on the Directors & Officers (D&O) insurance section of cover, thus preventing coverage for any losses or liabilities which could arise if the business were to go insolvent. When insurers apply an Insolvency Exclusion, this protects them from being financially responsible for any insolvency related D&O claims. This could be claims made against Directors who face personal liability for actions they may have taken that led to the company's insolvency i.e. deliberately deceiving or defrauding creditors, often through actions like misrepresenting the company's financial position or diverting assets. 

It later transpired that this Exclusion has been applied by their D&O insurer when they were at the very start of their business 13 years ago and therefore had no trading history so the risk of getting into financial difficulties and going insolvent was far greater. Fast forward 13 years and the company proved to have a strong financial trading history with a very healthy balance sheet. When our brokers discussed this with their underwriters and asked why this exclusion was on their D&O policy they said it had historically been applied and just continued to renew annually on this basis where their broker never flagged or challenged this as their business evolved and circumstances changed. Following our negotiations with their underwriters we successfully got them to remove this onerous clause. This in turn provided the client with added peace of mind that if they were to go insolvent and claims were brought against their Directors & / or Officers for any alleged ‘Wrongful Acts’, their D&O policy would now respond and defend these claims.

With the risk of insolvency across many business sectors, this could result in Directors & Officers being held personally liable. This case study highlights the need for businesses, with the support of their brokers, to take the time to continually review all aspects of their risk and the level of coverage held under their D&O policies, especially if cover is restricted and insolvency exclusions are applied.