Part 15 published on 01/08/06
No coverage under Directors and Officers Liability Insurance policy
Condominium owners sued the condominium corporation and other parties for alleged defects in the construction of the attics. The condominium corporation, in turn, sued a previous director of the condominium for failing to disclose the alleged defect. The director then sought the protection of the corporation’s Directors and Officers Liability Insurance policy. (That insurance policy had been arranged after the director’s time on the board.)
The Court said that there was no coverage for these claims under the Directors and Officers Liability Insurance policy, because, at the effective date of the policy, the condominium corporation had knowledge of the attic problem and could reasonably foresee that this might result in a claim.
[Editorial Comment: This case demonstrates one of the important difficulties with Directors and Officers liability insurance (D&O Insurance). The difficulty is as follows: D&O Insurance generally will not cover claims if the corporation could reasonably foresee the claim (i.e. the potential claim was known) at the time the insurance is obtained. When making the insurance application, the corporation normally must tell the new insurer about any known potential claims. The insurer will normally refuse coverage for those sorts of existing, known risks. And if the known risk (the known potential claim) is not mentioned in the insurance application, the policy will usually say that there is no coverage for that undisclosed potential claim (when it becomes an actual claim).
Note as well that the previous insurer (the insurer at the time of the mistake) likely has no responsibility. D&O Insurance is normally “claims made” insurance. This means that the insurance only applies to actual claims made during the term of the insurance (or during any extension period provided under the policy).
So the bottom line is as follows: If there is a “known potential claim” at the time a condominium corporation arranges or changes D&O Insurance, there may be no insurance coverage for that claim (when it arrives).