Notice-of-Circumstances Provisions in Claims-Made Policies

Generally, D&O, bankers' liability, and other claims-made insurance covers the liability of professionals to third parties only for claims that are both made (against the insured) and reported (to the insurer) in the same policy period. A limited exception to this rule, however, is carved out by notice-of-circumstances clauses typically found in claims-made policies. These clauses enable policyholders to obtain coverage for claims made against them after the policy's expiration but only if, before the policy period ends, they notify the insurer in writing of specific facts and circumstances they reasonably expect to lead, after the expiration of the insurance, to a claim against them. As to subsequently-made claims which actually do arise from the circumstances of which the insured notified the insurer, notice-of-circumstances provisions essentially enable insureds to keep any policy limit remaining on their expiring coverage in place during the succeeding policy period. Clearly, in the wake of the subprime crisis, policyholders with subprime exposures may seek to give notice of circumstances regarding their activities that may give rise to claims.

The law is clear, though, since notice-of-circumstances provisions work an exception to the requirement that the claims be reported to the carrier during the policy period, these clauses must be strictly construed. Courts recognize that a liberal construction would result in a free-of-charge expansion of the insurance. Strictly construed, the clauses require insureds to describe, at a minimum, the specific acts they reasonably believe are likely to result in a claim being made against them outside the policy's term ' in such a way as to advise a reasonable reader, i.e., the insurer, of the existence and nature of a potential claim. Insurers should evaluate their insureds' notification letters in light of this requirement. Statements that the policyholder is in financial difficulties or near bankruptcy as a result of its own subprime exposure, or general descriptions by the insured of its relationships with others whose involvement in the subprime crisis may have become notorious, or of 'anticipated' litigation expected to arise from any of these, will not satisfy the objective standard applied by many courts determining the sufficiency of notifications under notice-of-circumstances provisions.