A director’s insurance policy can be quite comprehensive as it can cover a lot of subjects that may be alleged in a charge. Now, it’s important to know that you can only avail of its full coverage if you make the proper claim.
And this is where a lot of directors make the mistake. They either leave out vital information in their claim or deliberately lie when making it. This is what is called misrepresentation and the presence of such an act can be detrimental to your intentions of getting the protection your policy provides for.
What is Misrepresentation?
The act of misrepresentation is simply issuing the false statement of a fact. As far as insurance law is concerned, it would involve providing false or heavily altered information in your claim or application which, if it were assumed to be true, would heavily impact the insurance policy provider’s decision to approve the mobilisation of funds to cover the claims.
Now, if you think that what was just describedsounds like fraud, it’s because it is. Fraud and Misrepresentation often getmistaken for each other but most insurance companies would lump them both into a single act. So, if you do file a claim that falsely states a fact, it’smisrepresentation to the insurance provider although, legally speaking, it isfraud.
This can be hurtful as misrepresentation as defined by the law is the issuing of a false statement under the belief, however, that such statement was true. What insurance companies consider as misrepresentation, then, connotes an element of deliberate misstatement of facts to injure the other party (in this case, the policy provider) while true misrepresentation merely connotes an assumption or belief that what you claim is actually true.
Why is Misrepresentation Harmful to Insurance Claims, Then?
Under normal circumstances, misrepresentation of claims can lead to a denial of benefits. Simply put, your claim is disavowed and you’d have to seek for coverage elsewhere.
However, there are extreme cases where misrepresentation of facts can lead to a complete cancellation of the policy. This means that you will not be able to use your policy for that instance and all upcoming instances regardless of how much you have already paid for it.
How can insurance companies get away with the latter? The Devil, as they say, lies in the detail. Take a look at your policy. At the stipulation of agreements, you should find several clauses which detail how and when your policy can get cancelled.
What you should be looking for is a clause for fraud or misrepresentation which should define fraud/misrepresentation as any claim based upon or arising from any deliberately fraudulent act or omission in the statement of the facts which constitute a willful violation of any statute or regulation made by the insured person.
To put that in the most basic of terms of possible, the contract should define fraud/misrepresentation as any act or omission that you do where you deliberately alter or conceal parts of the truth. Such act, in turn, constitutes a violation of the contract which means that the insurance provider reserves the right to deny the claim or terminate the entire policy, depending on the severity of the act.
What are Contestability Periods?
Even when you have gotten your policy approved, that doesn’t mean that you can use it immediately. In most policies, you will undergo what is called a contestability period which could last for a year or two. In here, the policy provider can outright deny any claim you have made especially if they find any ground for misrepresentation.
In some cases, the claim can be denied for misrepresentation even if it was not deliberately made. The reason for why companies do this is understandable: there have been countless instances in the past when policy holders would make claims shortly after getting their policies approved. For any insurance company, dealing with claims for policies that have yet to mature is not a feasible thing to do.
In contestability periods, you have no ability to dispute the denial unless your claim is for an emergency. So the burden of proving that the claim is not fraudulent is on you.
Now, here’s the good part: once the contestability period is over, it is the duty of the insurance company to make sure that every claim they deny from you is fraudulent. In other words, the burden of proof now shifts from you to them.
What Should You do if your DO Claim is Denied?
Having your DO claim rejected because of allegations of misrepresentation be disconcerting but it’s an obstacle that has various effective workarounds. Here are a few tips to remember when faced with a rejection letter.
- Know the Grounds for the Rejection
First, make sure that the insurance company states that your claim is rejected due to misrepresentation. Then, you have to understand on what grounds did the company stand on to make such a decision.
This is why you should be aware of fraud exclusions stipulated in the contract as most insurers fall back to that provision when they deny a claim. Another common support is a “Right to Reserve Policy” especially in cases where the contract is still in the contestability period.
Either way, you have to know for what reason and why your claim was denied. You will have need of this in the next few steps.
- Read the Policy (Again)
What you have to understand is that an insurance policy, by its mechanisms and design, is a form of contract. As a contract, it has terms and conditions which might benefit one party or the other, depending on what the framer of that contract intended for it.
Although it’s recommended that you read the entire policy before signing your name on the dotted line, there’s no better time to scrutinize your insurance policy when your claim gets denied. You should really understand what each provision entails as this will add to your support when you dispute the denial.
Also, this should be the ideal time for you to review your own companies policies regarding director indemnification. At least, you should get the commitment from the board and the company’s legal counsel that legal fees, settlements, and filing for replies in response to adverse judgments are going to be sufficiently provided for by the company.
What you have to understand, however, is that directors insurance policies are highly technical in nature. After all, they are catered towards corporate buyers who have an in-depth knowledge in the industry that they operate in. As such, you’d have to get creative in interpreting those provisions, making sure that your rights are sufficiently protected.
- Look at Your Other Options
If we are to be honest about it, a director’s insurance policy is not your only source of help in case you or your directors get slapped with a lawsuit. One of the reasons why your claim was denied because the company might feel that another insurance policy you might have availed of will be the better policy to cover the claim.
This often happens when you purchased other “related” D&O policies and policy you are making your claim at is the younger one based on the date it was initiated. This part can get tricky if you are not aware that a lot of directors insurance policies have this “related back” provision that say that all related claims are deemed to be one claim that was made during the first claim in the series.
Simply put, if you have made a similar claim from a different policy in the past, the issuer of the newer policy might request you to defer back to your previous holder if the claim that you have now is basically similar to the last.
It also does not help that a lot of policies share the same clauses. For example, suits for workplace injuries already being covered by General Liability insurances or sickness caused by harmful by-products made during the company’s operations are going to be covered by a lot of environmental protection liability policies.
Basically, if you have multiple policies, expect that your policy providers are going to play a game of Hot Potato over who’s going to cover your claim hence the denial of your request. It’s up to you find the right policy provider to raise the claim at and make sure that they don’t pass their responsibilities to someone else.
In Conclusion
So, does making untrue claims going to hurt your coverage for director’s liabilities? The short answer is yes. However,that does not mean that you have to deal with getting your coverage denied.
There are ways to dispute the claim in order to get the coverage you need or, at least, make sure that you and your directors get the necessary assistance despite having no access to the benefits you paid the policy for.
Do you believe that directors insurance claims deserve to undergo a lot of scrutiny? Do misrepresented claims deserve a second review before being fully denied? Let us know your thoughts in the comments below.
