ISO Claims-Made Policy

Summary: The Insurance Services Office (ISO) has developed a program to cover the liability and other management-related exposures of an organization. The management protection program offers executive liability, employment practices liability, crime and fidelity, and kidnap/ransom and extortion coverages, either individually or as a package. This article analyzes the executive liability coverage form, MP 00 01 10 06, a claims-made policy that provides coverage for individuals and reimbursement to organizations that suffer claims arising out of wrongful acts (a defined term).

Topics covered:
Insuring agreements
Extensions
Exclusions
Limit of liability and retention
Defense, settlement, and allocation
Conditions
Definitions
Other forms
Endorsements

Insuring Agreements

There are two insuring agreements on MP 00 01—coverage A applies to executive liability and coverage B applies to organization reimbursement.

Coverage A has the insurer paying on behalf of the insured persons (a defined term) such loss that those persons become legally obligated to pay as a result of a claim made against them arising out of a wrongful act (a defined term).

Since this is a claims-made policy, the claim has to be first made against the insureds during the policy period or during the extended reporting period that usually accompanies a claims-made policy. The wrongful act has to occur during the policy period.

And, the insuring agreement declares that the insurer will pay unless the insureds' organization has already indemnified the insureds for the loss. In that case, insuring agreement B comes into play.

Coverage B states that the insurer will pay on behalf of the organization such loss for which the organization has indemnified the insured persons as a result of a claim. This agreement also notes that this reimbursement will be made as permitted or required by law.

Extensions

MP 00 01 also has two coverage extensions—one for spousal liability and the other for estates, heirs and legal representatives.

If a claim against any insured person includes a claim against the insured person's spouse solely by reason of such spousal status or because of the spouse's ownership interest in property or assets that are sought as recovery for the wrongful act committed by the insured person, MP 00 01 provides coverage for the spouse. All loss that the spouse becomes legally obligated to pay is treated as a loss that the insured person is obligated to pay, but the loss to the spouse is covered only if and to the extent that loss would be covered if incurred by the insured person.

This extension of coverage does not apply to a claim arising out of any wrongful act committed by the spouse. MP 00 01 is not meant to apply to a spouse's direct wrongful acts; this point is reinforced by the fact that the definition of insured person does not include a spouse.

This policy affords coverage for claims arising out of the wrongful acts of the insured persons made against the estate, heirs, or legal representatives of a deceased insured person. Also covered is a claim made against the legal representative of an insured person in the event of incompetency, insolvency, or bankruptcy. This extension of coverage will afford coverage only if and to the extent that claims would have been covered by the policy.

Exclusions

MP 00 01 contains thirteen exclusions. And, note that the wrongful act of any insured person is not imputed to any other insured person for the purpose of applying these exclusions.

Dishonest or Criminal Act. MP 00 01 will not pay for any loss resulting from a claim based upon or arising out of any dishonest, malicious, fraudulent, or deliberately criminal act or any willful violation of any statute or regulation.

Bodily Injury, Personal Injury, Property Damage. Loss resulting from any claim for bodily injury, mental or emotional distress, or damage to or destruction of any property is not covered. Personal injuries such as defamation, libel, wrongful entry or eviction, false arrest, and malicious prosecution that cause a loss are also not covered.

Illegal Gains. A claim based on, attributable to, or arising out of the gaining of any profit, remuneration, or advantage to which the insured was not legally entitled is not a covered claim.

Accounting of Profits. MP 00 01 does not cover a claim based on an accounting of profits in fact made from the purchase or sale by any insured person of securities of the organization within the meaning of the SEC Act of 1934.

Retroactive Date. MP 00 01 is a claims-made policy and so, it may have a retroactive date shown on the declarations page (MP DS 01). This exclusion states that no coverage is granted to claims that are based on, attributable to, or arising out of a wrongful act that occurs before the retroactive date, that is, before the policy period begins.

For more information on retroactive dates and claims-made policies, see Claims-Made CGL Forms; in the print edition, the article is on the Public Liability A.7 pages.

Previous Policies. As a complementary exclusion to the previous one, this exclusion declares that this policy does not apply to claims that are based on, attributable to, or arising out of wrongful acts—or even facts—contained in any claim that has been reported, or in any circumstances of which notice has been given, under any insurance policy of which this policy is a renewal or replacement. In other words, a renewal policy will not apply to claims made during the previous policy based on acts committed during that previous policy period; there is no coverage spill-over from one policy to another.

Pre-Existent Claim. MP 00 01 does not apply to any claim based upon, attributable to, or arising out of any demand, suit, or other proceeding against any insured person or the organization that was pending on or existed prior to the applicable pending or prior litigation date shown in the declarations.

Failure to Effect Insurance. If the insured person or the organization fails to purchase or maintain insurance, MP 00 01 will not apply to any claim based on that failure.

Service in An Other Company. The policy does not apply to claims based on any wrongful act by any insured person serving in any position or capacity in any organization other than the organization named in this policy. This exclusion applies even if the organization directed or requested the insured person to serve in that other organization.

Subsidiaries. MP 00 01 does not apply to claims based upon, attributable to, or arising out of any actual or alleged act or omission of an officer or director of any organization that becomes a subsidiary (a defined term). This is so if the act occurred prior to the date such organization became a subsidiary.

Organization or Insured Person Claim. Claims brought by or on behalf of the organization or any insured person, in any capacity, are not covered. However, there are some exceptions to this exclusion:

The first exception is a claim that is a derivative action brought on behalf of the organization by one or more security holders who are not insured persons. These security holders have to bring the claim without the solicitation, assistance, or participation of any insured person or the organization.

The next exception is a claim by a former insured person for the actual or alleged wrongful termination of such person.

The last exception is a claim for contribution or indemnity by an insured person, if the claim directly results from another claim that is otherwise covered under this policy.

ERISA. A claim for an actual or alleged violation of the Employee Retirement Income Security Act of 1974 (ERISA) is not covered.

Pollution. Claims based on or arising out of the escape or release of pollutants are not covered. Pollution clean-up costs arising out of a demand or request or lawsuit are also not covered.

Limit of Liability and Retention

The most that the insurer will pay for all loss under coverage A, coverage B, or both is the aggregate limit of liability shown in the declarations. If this aggregate is exhausted by the payment of loss, the insurer has no further obligations or liability of any kind under the policy.

All claims arising out of the same wrongful act or interrelated wrongful acts of one or more insured persons shall be considered a single claim.

The amount paid by the insurer is that amount of loss in excess of the applicable retention amount shown in the declarations. A single retention amount will apply to all loss resulting from all claims alleging the same wrongful acts or interrelated wrongful acts. If the loss resulting from a single claim is covered in whole or in part under both coverages A and B, the maximum aggregate retention applicable to the loss will be the retention amount for coverage B that is shown on the declarations.

Claims expenses (a defined term) are part of the loss and are not payable in addition to the limit of liability. If such expenses are paid, this reduces the limits of liability available to the insured.

If the organization is permitted or required by law to indemnify an insured person for loss, but fails to do so (for any reason other than for financial insolvency), the payment for the loss under coverage A is subject to the retention amount applicable to coverage B as shown in the declarations.

Defense, Settlement, and Allocation

MP 00 01 declares that the insured persons must defend and contest any claim made against them; the insurer does not assume any duty to defend under this policy. However, the insured persons and the organization shall not admit or assume any liability, enter into any settlement, stipulate to any judgment, or incur any claims expenses without the prior written consent of the insurer. The insurer is entitled to (but not obligated to) associate in the defense and the negotiation of any settlement of any claim.

The insurer does promise to advance on behalf of the insured persons claims expenses that the insured persons have incurred in connection with the claims. These advance payments must be repaid to the insurer in the event and to the extent that the insured persons will not be entitled to payment of such loss.

The insurer may, with the written consent of the insured persons and the organization, make any settlement of any claim that is deemed reasonable. If the consent is withheld, the liability of the insurer will not exceed the amount for which the claim could have been settled.

If there is a covered loss and a loss that is not covered, then the insurer, the insured persons, and the organization will try to agree upon a fair and reasonable allocation of payment. If such an agreement comes into being, the insurer will advance claims expenses allocated to the covered loss. If there is no agreement, the insurer will advance claims expenses that the insurer believes to be covered until a different allocation is negotiated or judicially determined.

Conditions

There are ten conditions listed on MP 00 01.

Notice. As a condition precedent to any coverage under the policy, the named insured or any insured person must give written notice of any claim as soon as practicable, but in no event later than sixty (60) days after the end of the policy period.

If during the policy period, any insured person or the organization becomes aware of a specific wrongful act that may reasonably be expected to give rise to a claim, and written notice is given to the insurer, then any claim subsequently made against any insured person is deemed to be a claim made during the policy period. The written notice has to include the following information: a description of the wrongful act, including all relevant dates; the names of the persons involved in the specific wrongful act; particulars as to the reasons for anticipating a claim that may result from such specific wrongful act; the nature of the alleged damages; and the circumstances by which the insured persons or the organization first became aware of the specific wrongful act.

Extended Reporting Period. An extended reporting period is available by an endorsement—MP 28 01 10 06—to MP 00 01 if the policy is cancelled or not renewed. The insured has to request this item and pay the premium in full within thirty (30) days after the end of the policy period; once in effect, the extended reporting period may not be cancelled. As with the claims-made CGL form, this extended reporting period does not extend the policy period or change the scope of coverage provided; it applies only to claims to which the following applies: the claim is first made during the extended reporting period, and the claim arose out of a wrongful act that occurred on or after the retroactive date (if any) and before the end of the policy period.

There is no separate or additional limit of liability for the extended reporting period. The limit of liability available during the extended reporting period is the remaining amount, if any, of the aggregate limit of liability available at the time the policy was cancelled or nonrenewed.

Assistance and Cooperation. The insured persons and the organization shall, as a condition precedent to their rights under this policy, give the insurer all the information, assistance, and cooperation as the insurer reasonably requires.

Subrogation. With respect to any payments made under the policy on behalf of any insured person or the organization, the insurer is subrogated to the rights of recovery; the insured persons and the organization have to do everything necessary to secure and preserve these rights. Any recoveries, less the cost of obtaining them, will be distributed as follows: to the insured persons and the organization until they are reimbursed for any loss that they sustain that exceeds the sum of liability and the deductible; then to the insurer, until it is reimbursed for the payment made under the policy; then to the insured persons and the organization until they are reimbursed for that part of the payment equal to the deductible amount.

Other Insurance. If any loss resulting from any claim is insured by any other valid policy, this policy applies only in excess of the amount of any deductibles, retentions, and limits of liability under that other policy.

Assignment. No change, modification, or assignment of interest under the policy is effective without the written consent of the insurer.

Action Against Us. No action shall be taken against the insurer unless, as a condition precedent, there is full compliance with all the terms and conditions of the policy. No person or organization shall have the right under the policy to join the insurer as a party to any action against the insured person and the organization to determine the liability of any insured person; and, the insured persons and the organization may not implead the insurer to any action against them. The bankruptcy or insolvency of any insured person does not relieve the insurer of any of its obligations under the policy.

Representation and Severability. The insured persons and the organization represent that all the information and statements contained in the application are true, accurate, and complete. The insurer declares that that information is the basis for issuing the policy and is considered as incorporated into and constituting a part of the policy. In the event that the application contains any misrepresentation or misstatement of a material fact, the policy does not afford coverage to any insured person who knew of such misrepresentation or misstatement.

Changes in Exposure. If the organization acquires or creates another organization before or during the policy period, the insured persons of such organization will be covered under the policy, but only with respect to wrongful acts that occurred after that acquisition or creation.

If the organization is acquired during the policy period or merges with another organization such that the insured organization is not the surviving entity, then coverage under this policy continues until the end of the policy period; however, this coverage is only with respect to claims arising out of wrongful acts that occurred prior to the acquisition or merger. The full annual premium for the policy period is deemed to be fully earned immediately upon the occurrence of the merger or acquisition, and the insurer is to be notified as soon as practicable about the merger or acquisition.

If before or during the policy period, an organization ceases to be a subsidiary (a defined term), coverage will continue until the end of the policy period, but only with respect to claims arising out of wrongful acts occurring prior to the date the organization ceased to be a subsidiary.

Territory and Valuation. MP 00 01 covers wrongful acts that occurred or claims made anywhere in the world. All premiums, limits of liability, retention amounts, loss, and any other monetary amounts under the policy are expressed and payable in the currency of the United States.

Definitions

There are thirteen terms defined on MP 00 01.

Application. An application is the signed application for the policy, including any attachments and other materials submitted in conjunction with the signed application.

Claim. The definition of claim has four parts: it is a written demand for monetary or nonmonetary damages; it is a civil proceeding commenced by the service of a complaint; a criminal proceeding commenced by a return of an indictment; or it is a formal administrative or regulatory proceeding commenced by the filing of a notice of charges, formal investigative order, or similar document. The claim has to be made against any insured person for a wrongful act and it includes any appeal.

Claims Expenses. This means that part of a loss consisting of reasonable and necessary fees and expenses incurred in the defense or appeal of a claim. It excludes the wages, salaries, benefits, or expenses of any director, officer, or employee of the organization.

Financial Insolvency. This means the status of the organization resulting from: the appointment of any receiver, conservator, liquidator, trustee, rehabilitator, or similar official to control, supervise, manage, or liquidate the organization; or the organization becoming a debtor in possession.

Insured Person. An insured person means any former, present, or future duly elected director or duly elected or appointed officer of the organization.

Interrelated Wrongful Act. This means all causally connected wrongful acts.

Loss. A loss means claims expenses, compensatory damages, settlement amounts, legal fees, and costs awarded pursuant to judgments. A loss does not include civil or criminal fines or penalties imposed by law, punitive or exemplary damages, taxes, or matters that are uninsurable pursuant to applicable law.

Named Organization. This is the entity named in the declarations as the named organization.

Organization. The organization is the named organization and/or any subsidiary.

Policy Period. This is the period of time from the inception date of the policy shown in the declarations to the expiration date shown in the declarations, or its earlier cancellation or termination date.

Pollutants. This matches the definition on other insurance policies. It means any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned, or reclaimed.

Subsidiary. This means any organization in which more than fifty percent of the outstanding securities or voting rights representing the present right to vote for the election of directors is owned in any combination by one or more organizations.

Wrongful Act. A wrongful act means any actual or alleged error, misstatement, misleading statement, neglect or breach of duty, omission or act by the insured persons in their insured position or capacity for the organization; it also means any matter claimed against them solely by reason of their serving in such insured position or capacity. A wrongful act does not apply to a position or capacity in any entity other than the organization, even if the organization directed or requested the insured person to serve in such other position or capacity.

Other Forms

This management protection program includes other coverage forms in order to make a complete package of protection for the insured. Employment-related practices liability, kidnap/ransom and extortion, and crime and fidelity coverages are all available to complete this program; these coverage forms are analyzed elsewhere. For employment-related practices coverage, see Employment-Related Practices Liability Coverage; this information is on the Public Liability A.14 pages in the print edition of FC&S. The kidnap and ransom coverage can be found on the Crime A.11 pages; see Kidnap, Ransom, and Extortion Policy. The Crime tab in the Casualty & Surety volume of FC&S contains discussions of insuring forms and related issues based on the ISO and SAA (Surety Association of America) crime forms.

One coverage form that can be mentioned here is MP 00 02 10 06, executive liability and entity securities liability coverage form. This form is claims-made like MP 00 01 and applies to directors and officers of publicly traded companies. MP 00 02 is similar in wording to MP 00 01 except that it adds a third insuring agreement: entity securities liability coverage. This coverage has the insurer paying on behalf of the company such loss that the company becomes legally obligated to pay as a result of a securities claim that arises out of a wrongful act. A securities claim is defined as any claim brought by a securities holder of the company against any insured person or the company alleging violation of any securities laws (federal or state), or a claim that arises from the purchase or sale of any securities issued by the company.

MP 00 02 is also different from MP 00 01 in that the definition of a wrongful act is expanded to include any actual or alleged error, misstatement, misleading statement, neglect or breach of duty, omission or act by the company, but solely with regard to a securities claim.

Endorsements

There are several endorsements that are available for use with MP 00 01 and MP 00 02 to complement the program. The following are some examples.

MP 03 01 10 06. This is a coinsurance endorsement that states that, with respect to all covered loss, the insured persons and the organization will retain uninsured and at their own risk that percentage of all such loss specified as the coinsurance percentage in the schedule on the endorsement. The insurer then pays the remaining amount of the loss up to the limit of liability.

MP 04 01 10 06. This endorsement pertains to an outside service extension of coverage. MP 04 01 extends coverage to loss resulting from any claim made against the insured person serving in an outside position. The coverage is excess over any indemnification or insurance available from the outside entity. An outside entity is defined as any not-for-profit corporation, organization, or foundation that is exempt from federal income tax as an organization described in the Internal Revenue Code, or one that is organized for a religious or charitable purpose under any not-for-profit corporation act or statute.

MP 21 01 10 06. This is an exclusion pertaining to a designated professional service. With respect to any professional services shown in the schedule of the endorsement, the insurer will not pay for any loss resulting from any claim based upon, attributable to, or arising out of the providing of or failure to provide any professional service.

MP 21 02 10 06. MP 21 02 is a captive insurance/company operations exclusion endorsement. It states that the insurer will not pay for loss resulting from any claim based on or arising out of the ownership, management, maintenance, and/or control by the organization of any captive insurance company or entity.

MP 21 03 10 06. This endorsement, the parent organization exclusion, states that the insurer will not pay for any loss resulting from or arising out of any claim brought or maintained by four entities: any entity shown in the declarations of MP 21 03; any organization in which more than fifty percent of the outstanding securities is owned or controlled by the named entity; any past, present, or future security holder of the entity shown in the schedule; or any subsidiary, trustee, receiver, assignee, successor in interest, director, officer, shareholder, partner, limited partner, or beneficiary of the entity in the schedule.

MP 21 04 10 06. This endorsement is available for both MP 00 01 and MP 00 02. It excludes any loss resulting from any claim based upon or attributable to, or arising out of any excluded lawsuit or other incident that is shown in the schedule on the endorsement.

MP 21 05 10 06. This is a specific subsidiary exclusion endorsement. There is no coverage for any loss resulting from any claim based on a wrongful act of the insured persons serving in the capacity of a director or officer of the entity shown in the declarations of MP 21 05.

MP 21 06 10 06. This is a pending or prior litigation exclusion endorsement for newly acquired subsidiaries. MP 21 06 declares that the insurer will not pay for any loss resulting from any claim first made before the pending or prior litigation date shown in the schedule against any subsidiary, its directors, or officers.

MP 21 07 10 06. MP 21 07 pertains to an initial public offering (IPO). The endorsement declares that the insurer will not pay for any loss resulting from any claim based on or arising out of any wrongful act committed in connection with an actual, attempted, or proposed IPO of any securities issued by the organization. These claims include but are not limited to claims brought by: any governmental or regulatory entity; any security holder, or any other claimant.  And, it includes claims that are direct, derivative or class action claims.

MP 21 08 10 06. This endorsement adds an exclusion onto MP 00 02. Under this endorsement, the insurer will not pay for any loss resulting from any claim based upon, attributable to, or arising out of any wrongful act actually or allegedly committed in connection with the purchase, sale, offer, or solicitation of an offer to purchase or sell any securities of the organization in a secondary public offering (SPO) of securities. The claims include but are not limited to claims brought by the government, any security holder, or any other claimant, whether in a direct lawsuit, a derivative, or class action lawsuit.

MP 21 09 10 06. Intellectual property liability is excluded with the use of this endorsement. It states that the insurer will not pay for loss resulting from any claim based upon or arising out of any actual, alleged, or prospective copyright, patent, trademark, trade secret, or licensing rights of the organization.

MP 21 10 10 06. The name of this endorsement is the fungi or bacteria exclusion endorsement. This is the anti-mold endorsement in that fungi is defined to include mold or mildew, and loss resulting from or arising out of the effects of fungi or bacteria is not covered.

The terrorism endorsements are numbered MP 21 13 01 06 through MP 21 16 01 06.