A court held that a D&O policy’s Representations and Severability section’s advancement of loss (“AoL”) provision obligates the carrier to advance defense costs as incurred.

An Insured’s general counsel submitted a claim for coverage under the company’s D&O policy arising out of an SEC proceeding against him. The carrier denied coverage citing to certain exclusions. The Insured argued that the policy required the carrier to pay the attorneys' fees incurred during the SEC proceeding and that the AoL provision obligated the carrier to advance those fees as they were incurred regardless of the carrier’s assertion that an exclusion may apply. The carrier argued that the AoL provision was limited to the Representations and Severability portion of the policy and, therefore, could only be triggered when the carrier seeks to void the policy on the basis of a misrepresentation in the insurance application.

Upon interpreting the AoL provision, the court found it was not itself a promise of insurance, but a promise of when insurance will be paid. The provision states:

Thus, the carrier may refuse to advance costs either: (1) when the carrier obtains a court order that "such advancement is not required," or (2) when the carrier obtains a court order that "coverage is void ab initio." Advancement only ceases when a court makes such a determination.

The carrier also argued that it had no duty to advance defense costs, regardless of the AoL provision, because the policy did not include a "duty to defend" and “New York courts require the advancement of defense costs in the absence of a duty to defend clause only when an insurer seeks to void an insurance policy and not when an insurer claims that a policy exclusion applies.”

The court disagreed. Under New York law, an insurer's obligation to reimburse defense costs is triggered when defense costs are incurred, not when a judgment is finally entered against the insured. "The only reasonable interpretation of [a] loss clause in [a] . . . [Directors and Officers] Policy is that the insurer's obligation to pay accrues when the insured incurs the obligation, not after it has paid a judgment."

The carrier was thus obligated to pay the Insured's defense costs until a court determined otherwise.

Insureds cannot rely on the extended reporting period or a post-policy reporting window to submit claims made before the runoff policy began.

After defaulting on a promissory note signed during the sale of the law firm, the lawyer was sued on eleven counts of fraud and entered a plea, admitting liability. The lawyer reported the matter to his Lawyers Professional Liability Insurer; however, during the sale of the firm, its policy was placed in runoff. When the policy was placed into runoff, the following language was added to the policy, defining an extended reporting period as: 

The lawyer knew of this claim before the placement of the runoff policy date. However, the Insured did not report it until after the policy’s original expiration date (that was overwritten by the runoff date). The policy had an automatic post-policy reporting window and the optional extended period; however, the court decided that none assisted the lawyer in this case.

The court decided that both, the automatic post-policy reporting period and the optional extended reporting period which was purchased only cover the claims that were first made after the end of the policy period (here, the runoff date), yet they did not extend the reporting deadline for the claims made before the runoff policy incepted. Thus, according to the court, the Insurer did not have the duty to defend or indemnify. 

A nonprofit organization (the “Company”) serving communities in the Washington, D.C. area, was insured under a claims‑made policy for a period of three years. That policy was issued by the prior carrier (the “Carrier”) and included coverage for nonprofit directors and officers liability and employment practices liability. While the prior policy was still in place, the Company bound a new policy (the “Second Policy”) which provided directors and officers liability, employment practices liability, fiduciary liability, and crime coverage.

During the Carrier’s policy, the Company fell victim to a fraudulent scheme that resulted in multimillion‑dollar wire transfers from the Company’s funds to unauthorized accounts in Hong Kong. The Company notified to the Carrier of the incident prior to the Carrier’s policy expired via an email. After the Carrier’s policy expired, the Company received a written demand for monetary damages, which the Company passed along to the Carrier. Although the demand was made after expiration, the Carrier’s policy contained an additional 90‑day automatic reporting period for claims arising during its policy period.

The Carrier denied coverage, asserting that the extended reporting period had terminated because the policy provided that any extended reporting period terminated upon the effective date of “any other insurance issued to the [Company] which replaces this insurance.” The Carrier argued that the Second Policy replaced the Carrier’s policy and thereby terminated the extended reporting period prior to the written demand.

The lower court determined that the email sent to the Carrier did not constitute valid notice of a claim under the Carrier’s policy. Thus, the remaining issue was whether an extended reporting period existed when the Company submitted the demand, since the Company had purchased an optional one‑year extended reporting period to retroactively cover claims under the Carrier’s policy.

During the present litigation, the parties disputed the meaning of the words “any other insurance” and the word “replaces.” The Carrier maintained that the Second Policy replaced its policy because it was a separate, subsequent policy providing overlapping categories of coverage. The Company, on the other hand, argued that replacement required the Second Policy to cover the specific claim at issue.

Applying ordinary policy language, the court concluded that “other insurance” does not require claim‑specific overlap and that the Second policy qualified as replacement insurance because it succeeded the Carrier’s policy and provided similar coverage. As a result, the extended reporting period terminated when the Company bound the Second Policy and thus, no extended reporting period was in effect when the Company submitted the claim.