Failure To Maintain Insurance—Archived Article

October 2004

Language excluding loss from failure of directors and officers or corporations to effect and maintain insurance was incorporated into most policies when D&O liability coverage was popularized over 30 years ago. However, insurers often removed these exclusions by endorsement. This practice became so common that most policy forms no longer contain failure-to- maintain-insurance exclusions.

During the restricted insurance market of the mid-1980s, D&O insurers again began to use these exclusions. At that time, businesses often found it very difficult, if not impossible to obtain adequate liability insurance. Many businesses thus suffered uninsured losses for which the corporations' directors and officers sometimes were blamed. It was this risk of insurance inadequacy that prompted underwriters to reintroduce the failure-to-maintain-insurance exclusion.

Although uncommon today, a few policies contain a failure-to-maintain- insurance exclusion with language similar to the following example:

The INSURER shall not be liable to make any payment for ULTIMATE NET LOSS arising from any CLAIM(S) made against any DIRECTOR or OFFICER:

based upon, arising out of or attributable to any failure or omission on the part of the DIRECTORS, OFFICERS and/or the COMPANY to effect and maintain insurance(s) of the type and amount which is customary with companies in the same or similar business.

AEGIS 6100 (1/98)

Some D&O insurers may expand the failure-to-maintain-insurance exclusion to include the additional reference to bonds or suretyship. Because bond and suretyship may or may not be considered insurance, such wording is less desirable than language that excludes only insurance. A few insurers may also expand the exclusion to include self-insurance and/or self-insured-retention programs. The reference to self-insurance is highly undesirable, as there is no universally accepted definition of the term self-insurance.

While most D&O insurers no longer include a failure-to-maintain-insurance exclusion in their policy forms, some insurers may include the exclusion via endorsement to the policy. If it is not possible to entirely remove the exclusion, language without the reference to surety and insurance adequacy is preferable. Exclusions that include self-insurance or self-insured retentions are particularly ambiguous and should be avoided.

 

 

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