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Article | FINEX Observer

Read the instructions: Noticing circumstances in claims made policies

Financial, Executive and Professional Risks (FINEX)
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By Adam Cantor | April 22, 2020

The Notice of Circumstances (NOC) is a valuable tool for insureds but should be used with care and a full understanding of its application.

The Notice of Circumstances (NOC) is a valuable tool in the insured’s toolbox, but like all tools, it should be used with care and only after the user has “read the instructions.” While there may be benefits to noticing circumstances in some situations, there may be consequences for submitting an insufficient notice, including possible rejection of the NOC and declination of a future claim.

Generally speaking, claims made policies, such as most financial and professional risk policies, provide insureds with the option of reporting potential claims. Any future claim based on those circumstances will be “parked” in the current policy period. For example, a company’s directors and officers may become aware of a problem, error, loss or dissatisfaction involving a party who could become a future claimant, although no formal action has yet been taken against the insured. Such awareness can result from various sources (e.g., news articles, social media or law firm press releases regarding possible “investigations” into target companies and seeking plaintiffs for potential litigation). By “parking” future claims in an expiring policy period, our clients effectively have enhanced policy limits in future policy years as the new policy will not be encumbered by the claim already noticed as a NOC in a prior policy period.

Noticing a NOC can be especially helpful when renewal terms provide higher retentions or new exclusions that might apply to the circumstances that could give rise to a claim. It can also be useful where a client is switching carriers at renewal or simply to keep a new carrier’s limits unimpeded.

While the NOC provision sounds simple, in application, a number of issues can arise regarding whether the NOC was sufficient. Whether meritorious or not, insurers may attempt to argue that the NOC was not specific enough, or a subsequent claim is not exactly the type of potential claim described in the NOC.

The primary issues to consider with respect to NOCs relate to timing and specificity. An ancillary issue to be aware of is whether, by virtue of reporting a NOC, the insured may later run afoul of a “prior notice” exclusion or limitations in the Extended Reporting Period clause, if applicable.

Timing

While the insured retains the option to report a NOC, if it chooses to do so, the NOC generally must be reported in the same policy period in which the circumstances arose and became known to the insured. In other words, you cannot wait and report a NOC in policy period B for circumstances that came to light in policy period A. To be valid, the NOC must be reported in policy period A. Of course, because reporting circumstances is optional, the insured is not prejudiced by choosing not to report a NOC. In this particular scenario where circumstances discovered in policy period A were not reported as a NOC in that policy period, the insured would just have to wait until the circumstances ripened into an actual “claim,” and then report the claim to the insurer in that policy period.

Specificity

NOC language can differ greatly from policy to policy, so it’s critical to work with your broker to review the particular wording in place before drafting and sending a NOC letter. One should try to match, as closely as possible, the description of the circumstances with the policy’s NOC requirement. The biggest differential between NOC provisions is in the amount of “specificity” required in the notice. Consider and compare the two following examples:

Policy A:

If, during the Policy Period [an Insured] (1) receives written or oral notice from any party that it is the intention of such party to hold any Insured responsible for a specific alleged Wrongful Act, or (2) becomes aware of any circumstances that may give rise to a Claim against any Insured responsible for a specific Wrongful Act; and, as soon as practicable, gives written notice of the potential Claim to the Insurer…and such notice includes (1) the reason for anticipating such Claim, (2) the nature and date of the alleged Wrongful Acts, (3) the alleged injury, (4) the names of the potential claimants and any Insured Person involved in the alleged Wrongful Acts, and (5) the manner in which any Insured first became aware of the potential Claim, then any Claim, the potential of which was specifically identified as required above, shall, for the purposes of this Policy, be treated as Claims made during the Policy Period.

Policy B:

If during the Policy Period an Insured becomes aware of circumstances which could give rise to a Claim and gives written notice of such circumstances to the Insurer, then any Claim subsequently arising from such circumstances shall be deemed to have been first made during the Policy Period in which the written notice described above was first given by an Insured to the Insurer.

Policy A requires more specific, detailed information with the NOC, while policy B’s provision is less specific and more subjective. By adhering to the specificity standards of your actual policy, it is less likely the insurer will challenge or decline to accept the notice on the basis of “vagueness” or “lack of specificity.”

“Prior notice” exclusion

Many policies contain exclusions that bar coverage for claims alleging or arising out the same facts, acts or circumstances “of which notice has been given under any policy of which this policy is a renewal or replacement.” With such wording, a problem can arise where a NOC was reported but rejected under policy period A (e.g., it failed for vagueness or lack of specificity), but then is reported under policy period B once it develops into an actual claim. The policy B insurer could attempt to deny coverage, arguing that the exclusion bars coverage because the claim arose from circumstances previously reported in the NOC submitted (even if rejected) under policy period A. To mitigate against this problem, wording may be available that limits application of the exclusion only to matters or circumstances of which notice has been given “and accepted” under the prior policy or, alternatively, that the exclusion will not apply if the notice of circumstances was rejected under the prior policy.

Issues with noticing circumstances during the extended reporting period

To the extent policies provide for the election of a “Discovery Period,” or “Extended Reporting Period” (ERP), many insurers’ ERP clauses do not permit submission of NOCs during the ERP. For companies that decide to elect discovery, whether because of nonrenewal, change in control or otherwise, consideration of whether to notice circumstances should be made in consultation with your broker and/or counsel before commencement of the ERP and upon evaluation of whether NOCs are permissible under the terms of the ERP clause.

Conclusion

In all events, work with your broker and/or counsel to carefully review your policy’s NOC provision to know what facts and level of specifics are necessary, and to provide as much information as necessary to make the NOC effective.

Disclaimer

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast, Inc. (in the United States) and Willis of Canada, Inc.

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