Most management and professional liability policies—like directors and officers (D&O) liability, professional liability, errors and omissions (E&O) and employment practices liability (EPL)—are written on a “claims-made” basis, which means that they provide coverage based on when the claim is first made against the policyholder, not when the underlying accident, injury or wrongful act occurred. Most companies are aware of the need to give notice after receipt of a lawsuit, enforcement action or monetary demand.

But what if the company thinks there is a legitimate risk of a claim in the future based on customer inquiry, regulator communication or internal investigation that is not yet a formal “claim”? The New York Federal Reserve Bank, for example, recently published a paper identifying liquidity concerns based on net outflows at 22 banks. The Office of the Comptroller of the Currency (OCC) recently released its semi-annual report highlighting key risks in the federal banking system. We previously discussed insurance underwriting, transactional and litigation risks associated with the well-publicized failures of SVB and Signature Banks. Is there anything that banks facing liquidity or more broader adverse market conditions can or should do to preserve insurance coverage?

The good news is that most claims-made policies allow for notice of circumstances (NOC) to preserve rights under an existing policy should a claim materialize in the future. Evaluating whether to provide a NOC and, if so, how to do so appropriately under the policy is often easier said than done. We highlight some of the key differences in notice versus NOC, the pros and cons of submitting a NOC and several common missteps to avoid when evaluating whether and how to provide notice of a potential future claim.

Notice of Claims Versus Notice of Circumstances

Notice of claim is a formal request by the policyholder to the insurer for indemnity for a covered loss or policy event. It applies to “claims,” which commonly is defined to include civil lawsuits, administrative proceedings, and the resultant demands for damages or other relief. A NOC, in contrast, is used to alert the insurance company of potential factual circumstances or situations that may give rise to a claim in the future. While policies vary, a typical NOC provision may say:

If during the Policy Period the Insured shall become aware of any act, error or omission which may subsequently give rise to a claim being made against an Insured and shall during the Policy Period give written notice of such act, error or omission, then any claim which is subsequently made against the Insured arising out of such act, error or omission shall for the purpose of this policy be treated as a claim made during the Policy Period.

If the policyholder provides timely notice of circumstances, the insurer will consider any later claim that arises out of the noticed circumstances to have been first made during the policy period in which the notice was given. This is the case whether the claim is made weeks, months or even years after the policy expires.

Considerations and Potential Pitfalls to Avoid When Providing Notice of Circumstances

Determining whether to provide notice of circumstances requires careful consideration of the potential consequences. Proactive risk management can be key to securing coverage, however, policyholders should keep the following in mind.

1. The Insurability Myth. A common concern is the perceived risk that providing notice of any kind, including NOC, will lead to higher premiums, bigger retentions, less coverage or all of the above. Impacts on future coverage are usually not so dire, however, since most of the time circumstances that may give rise to future claims are (or should be) disclosed anyway during the underwriting process. Most applications typically ask that the applicant disclose information about not only prior loss history but also any incident or circumstance that the applicant reasonably believes could give rise to a future claim under the policy.

2. Timing Is Everything. Unlike notice of a claim, which usually allows notice within a certain amount of time after the current policy expires, there is generally no such grace period for NOCs. Policies may also differ as to whether a NOC may be submitted during an extended reporting period (like a “tail” or “runoff” period following a change in control) or whether notice is only permitted during the original policy period. If timely notice is not provided, the insurer may take the position that a future claim is not covered under the noticed policy. Understanding these critical differences in timing for notice of claims versus potential claims can make or break coverage.

3. Compliance With NOC Provisions. Policyholders should carefully review the requirements of their policy’s provision governing notice. While notice of “Claims” are usually simple communications providing a copy of the written demand, complaint or other triggering document, provisions allowing NOC are usually more onerous. Policyholders generally must provide “full particulars” about the circumstances giving rise to the anticipated claims, which may include:

• the nature of the alleged wrongful acts;
• the names of potential claimants that may bring a claim;
• the names of potential insured persons that may have committed wrongful acts;
• the types of damages sought by potential claimants; and
• the circumstances by which the policyholder became aware of the potential claim.

Determining how much information to include in a NOC can be a challenge in and of itself. If the notice is too specific as to the potential future claim, the insurer may use it to exclude coverage if a future action arising from the noticed circumstances is different than what was detailed in the notice. Generic notices that are too vague pose a separate problem if they fail the specificity requirements and allow the insurer to reject the notice as non-compliant with the policy terms.

In some cases, the inability to describe “full particulars” about the potential causes of action or putative claimants may be an indication that NOC is not warranted. For example, many policyholders across industries may have considered providing a NOC during the COVID-19 pandemic given the uptick in pandemic related claims, from government investigations to securities class actions. More recently, banks and similar financial lines entities may face liquidity risks or increased regulatory concern based on other industry-specific risks, such as risks related to elevated interest rates, growth or asset concentration, that are well founded but not tied to a specific demand or event. For example, the recently published OCC report noted above highlights risks that it currently sees in the federal banking system, which include credit, market, operational and compliance risks. In these instances, the company may be asked to provide more specific information about anticipated factual and legal grounds supporting those concerns to preserve potential coverage. Policyholders must determine whether they can provide the right information to satisfy their policy’s NOC requirements.

4. Consider Confidentiality. Disclosure concerns go beyond just satisfying the policy’s notice provisions. If insurer communications are not privileged in future litigation or subject to regulator examination, the company may be hesitant to specify in detail the legal or factual grounds for future liabilities that are far from certain. Further, banks and other regulated entities may not even be permitted to disclose all information to actual or potential claims if, for example, it is protected from disclosure (think CSI or confidential supervisory information). Some policies account for these considerations, but in the absence of safe-harbor language, the policyholder may be forced to either seek regulator approval for disclosure or risk failing to satisfy the policy’s specific NOC requirements.

5. Beware of Impact on Coverage Under Future Policies. Providing notice now may impact future coverage. Specifically, prior notice exclusions may apply if a notice of claim or circumstance was made under a prior policy. Many claims-made policies limit this exclusion to claims noticed and accepted for coverage under a prior policy. A prior notice exclusion may include broad “arising out of” language that applies to any fact, circumstances, situation, event or wrongful act that was subject to any notice of claim or potential claim under any other policy. If exclusions do not also specify that notices must have been accepted under the prior policy, the company may be left with two denials and no coverage. Evaluating these kinds of exclusions and, if needed, negotiating improvements can avoid surprise denials.

Bottom line, the decision of whether to report such information to an insurer can have important consequences on coverage and may even impact subsequent policies. Forecasting future claims can be an uncertain and demanding process. Policyholders should keep these considerations in mind when determining whether to provide notice of a potential future claim in order to preserve the right to seek coverage at a later date.

Conclusion

Determining whether to submit an NOC requires careful consideration of the practical effects. Engaging competent coverage counsel before the notice period expires can help ensure that future claims are covered under your claims-made policy.