This is the second post in our series regarding coverage issues affecting emerging companies. This post addresses the insurance application process. The application is a critical part of the process because insurance companies use it to assess whether they want to take on the risk, and if so how much premium to charge. The carrier can attempt to rescind an insurance policy if there was a material (but not necessarily intentional) misstatement or omission of fact in the application. Rescission of an insurance policy means it is as if the policy was never issued and the policyholder simply gets a refund of the premium paid and the carrier walks away.
First, it is critical to understand that an insurance application is not a form that can be completed by anybody in your organization. For many policies, the application will be attached and actually become part of the policy when it is issued. When a claim is made, the application will be one of the first places the carrier looks to see whether the insured is entitled to coverage or vulnerable to a rescission claim.
Second, the application will ask questions not only about pending claims or losses, but also about issues you’re aware of that could potentially give rise to a claim or loss in the future. The application may ask about your company’s internal compliance and risk management practices. It is also common for the application to incorporate your company’s public filings by reference.
Third, when filling out the application, it is important to remember that you are answering questions not just on behalf of yourself, but on behalf of the company, senior management, the Board of Directors, your legal department, and your risk manager if you have one. Accordingly, it is important that everyone is polled to ensure that the information being provided in the application is accurate.
Fourth, the knowledge of certain key individuals – usually the CEO, CFO, and the general counsel – will often be imputed to the company as a whole and thus the knowledge of one of those individuals may void coverage for the company itself. At a minimum, however, the carrier may seek to bar coverage for those who knew that information was inaccurate at the time it was provided.
Fifth, Directors and Officers Liability and Errors and Omissions policies often have non-standard wording and may even contain an “application exclusion” so those policies should be closely reviewed before placement.
By carefully answering every question in your insurance application, you will avoid headaches and heartburn down the road if and when you have to make a claim.