Insurance Glossary

Items in bold italics have their own definition in this section.

Claims Made Coverage
Most Directors & Officers, Employment Practices, and Professional Liability insurance policies are written on a ‘claims made’ basis instead of an ‘occurrence’ basis that is more common to general liability and property insurance. In a claims made policy, a claim must be made while the insurance policy is in force in order for it to be covered. Further, the incident which gave rise to the claim must have occurred prior to the retroactive date (see definition)

With a claims made form, the insurance must be in force when the claim is made. So if you retire or your firm ceases operations, and you stop buying the insurance, claims made later would not be covered. This can be addressed by purchasing an Extended Reporting Period endorsement, otherwise known as Tail coverage.

Cyber Liability Insurance
Cyber Liability coverage is for first and third party risks associated with e-business or online Internet business, networks, and information technology. Cyber Liability offers cutting edge protection for claims and exposures arising out of internet operations and communications.

Losses and claims covered under this type of policy can include privacy issues, infringement of intellectual property, virus infection/transmission or most any other serious problems that might be passed along via the World Wide Web.

Directors and Officers Insurance
This is a specialized form of professional liability insurance for legal defense and liability awards to shareholders, bondholders, creditors and others for the actions, errors, or omissions by a member of the board of directors of a corporation or non-profit organization.

Directors & Officers liability insurance provides financial protection for the directors and officers of your organization in case they are sued for failure to properly perform their duties as a director or officer. You can think of it as errors and omissions coverage for management.

Coverage is almost always on a claims-made basis, and the policy may or may not also provide Employment Practices Liability Insurance (EPLI).

Duty to Defend Clause
A Duty to Defend clause states that the insurer will appoint defense counsel and assume defense of a covered claim. This process is more common in errors and omissions (E&O) and employment practices policies liability. It can mean that the insurance carrier is responsible for defending a claim even if the basis for the claim is fraudulent, frivolous or not a covered cause of loss under the policy.

Since many claims under Employment Practices, Fiduciary Liability, and Professional Liability can involve frivolous allegations or claims for an action that would not be covered under the policy (for instance, a claim that management deliberately broke an applicable law) this coverage is very important. Often, the only money involved in these claims is defense costs, but they can easily run in to the tens of thousands of dollars.

Employment Practices Liability Insurance (EPL or EPLI)
Employment practices insurance protects the corporation, its directors, officers, and employees for claims resulting from discrimination, sexual-harassment, wrongful discipline, failure to employ or promote, and other employment-related allegations. These claims can come from employees, former employees, or potential employees.

EPLI can be sold as a standalone policy, or it is often attached to Directors and Officers insurance coverage.

Even if the allegations are determined to be fraudulent or frivolous, defense costs in a typical case average $100,000 - $200,000 per case!

Entity Coverage
This coverage extends coverage of a Directors and Officers insurance policy to the corporate entity for all covered claims. This coverage is normally only available for privately held companies. Exclusions will apply to this extension.

Until the mid-1990s, claims directly against the corporate entity were not insured under a D&O policy. This resulted in the insured and the insurer conducting an allocation process to determine what portion of a claim was to be covered under the D&O policy. Court decisions have resulted in entity coverage now being available. Depending on the insured, entity coverage may be available for all claims, or securities claims only.

Errors and Omissions Insurance Coverage
This is coverage for liability resulting from errors or omissions in the performance of professional duties. Errors and Omissions coverage is applicable as a general rule to professional business activities such as banking, accounting, law, insurance and real estate.

See also Professional Liability Insurance.

Extended Reporting Period
The Extended Reporting Period starts after the claims-made policy leaves off or expires. This allows coverage to be purchased for occurrences that happened when the policy was effective but after the policy ended (expired). Normally, these would not be covered because the claim was not made during the period that the policy was in force.

Tail Coverage or the Extended Reporting Period is typically used when a professional retires or sells their practice, to be sure that claims resulting from something that happened before the sale or retirement but not reported until after, can still be covered.

Extended Reporting Period coverage is not free, and must be purchased for a specific length of time.

Failure to Maintain Insurance Exclusion
Excludes claims arising out of the insured's failure to effect and maintain adequate insurance coverages to protect corporate assets.

Fiduciary Liability Coverage
Fiduciary Liability protects the fiduciaries of health and welfare, or pension plans from claims by employees alleging financial loss due to mismanagement of funds.

Fiduciary liability, also known as pension trust liability, provides coverage for loss that the insured becomes legally liable to pay because of a claim made against the insured for any alleged wrongful act by such insured or by any other person for whom the insured is legally responsible. It also covers the defense costs in connection with a covered claim. The policy is written on a claims made form.

A wrongful act includes any violation of the responsibilities, obligations, or duties imposed on fiduciaries by the Employee Retirement Income Security Act (ERISA), as well as acts, errors, or omissions in the performance of the duties of the plan administrator. The ERISA definition of a fiduciary is very broad. It is any person so named in the plan or any person who exercises any discretionary authority or control with respect to the management or administration of the plan or its assets.

The rules and regulations of ERISA include strict guidelines for fiduciaries. Failure to comply can result in lawsuits from employees, former employees, and beneficiaries, as well as the Secretary of Labor, Treasury Department, and Pension Benefit Guarantee Corp. The sponsor corporation as well as the individual fiduciaries are at risk.

ERISA also has a broad definition of what is considered an employee benefit plan. It includes any plan, fund, or program established or maintained for the purpose of providing employee benefits to its participants or beneficiaries. Under a fiduciary liability policy, the insured includes the following:

• The sponsor organization
• The plan(s)
• Any natural person in his/her capacity as fiduciary or administrator of the plan(s)

Most fiduciaries are unaware of their personal financial risk or that of the sponsor organization. Fiduciary liability coverage provides one way of reducing the risk and providing protection for the sponsor organization and individual fiduciaries.

Long-Tail Exposure
Exposures for which a claim might be filed long after the insurance policy or policies expire. Loss may not be recognized for many years, involving such latent injuries as asbestos, medical malpractice, and sexual abuse or molestation. Any exposure involving children can often result in a long-tail exposure because they are able to bring a court action after they reach the age of majority.

Malpractice Insurance
See Professional Liability Insurance

Outside Directorship Coverage
Outside Directorship coverage provides coverage for claims brought against the insured's directors and officers while serving as a director or officer of an outside entity (any non-profit organization or scheduled for-profit organization) when the insured has requested that they serve in such capacity. The coverage applies on either a triple or double excess basis. Triple excess means that the insurer's policy applies excess of the outside entity's indemnification provisions, the outside entity's applicable insurance, and the insured's indemnification provisions. Double excess means that the insurer's policy applies excess of any applicable insurance or indemnification available to the director or officer from the outside entity.

Prior Acts Exclusion
The prior acts exclusion excludes claims arising from wrongful acts occurring before the retroactive date. As noted under discussion of the retroactive date, sometimes prior acts coverage can be purchased, subject to company guidelines and underwriter discretion.

Professional Liability Insurance
Also known as malpractice coverage or errors and omissions (E&O) coverage; covers liability for damages arising from the rendering of or failure to render professional services.

Retroactive Date
This is also known as the Retro Date. Claims resulting from wrongful acts committed prior to this date are not covered under the policy. In many cases, the retroactive date is set at the first date insurance was purchased for this person or entity.

Coverage with no retroactive date is also known as Full Prior Acts coverage and may be available at the discretion of the underwriter.

Self-insured retention
A self-insured retention is similar to a deductible except that until the SIR is exhausted the insured will generally be responsible for performing the loss adjustment functions that would otherwise be undertaken by an insurance company.

Some professional liability policies come with ‘First Dollar Defense’ coverage which would mean that the self insured retention, or deductible, does not apply to defense costs.

Tail Coverage
See Extended Reporting Period