While an “occurrence” based policy is generally triggered by a certain event, policies providing directors and officers (“D&O”) coverage do not necessarily relate to a certain act. Instead, coverage under a D&O policy typically is triggered by a “claim” arising out of a “wrongful act.”
WHAT IS A CLAIM?
A claim is typically a demand for monetary relief. Many courts (and many policies) also include demands for non-monetary relief, such as an injunction, in the definition of “claims.” See e.g., National Cas. Co. v. Great Southwest Fire Ins. Co. , 833 P.2d 741 (Colo. 1992); City of Marion v. National Cas. Co. , 431 N.W.2d 370 (Iowa 1988). A claim does not necessarily have to be written - an oral demand maybe sufficient. Phoenix Ins. Co. v. Sukut Const. Co. , 186 Cal. Rptr. 513 (Cal. Ct. App. 1982). The bottom line is that a claim is generally sufficient whenever a claimant makes a demand for a legal right against an insured.
WRONGFUL ACT
However a claim is made, that will not necessarily trigger coverage under the policy. If the claim does not arise out of a “wrongful act” then coverage has not been triggered. “Arising out of” is generally broadly interpreted to include any causal connection. For instance, allegations of two separate claims arising out of the same conduct was considered to be “arising out of” the same act for purposes of a related claims provision. Gregory v. Home Ins. Co., 876 F.2s 602 (7th Cir. 1989).
A “wrongful act” is generally a defined term in the policy. Typically they include breach of contract, acts, omissions or errors, among others. The key here is that the “wrongful act” must be made by the insured person in his capacity as an insured under the policy. For instance, a director who breaches her contract to purchase a personal automobile does not act in her capacity as a director - she is acting solely in her personal capacity. However, a director who makes defamatory statements about a member of the organization (for instance, a homeowners association) arguably acts in both a personal capacity (the director may have personal dislike for the claimant) or in their official capacity as a director. Here, courts would likely favor providing coverage and hold that the defamatory statement was made in the capacity as insured.
INTERRELATED CLAIMS
Claims arising out of the same acts generally are considered to be interrelated for purposes of exclusions. So, if one set of circumstances results in two separate claims made by a claimant against an insured, one within the policy period and one after the policy period, the two claims will generally be considered one “claim.” However, there are exceptions to the rule. For instance, in Home Ins. Co. v. Spectrum Info. Tech., 930 F.Supp. 825 (E.D.N.Y. 1996), the court held that several lawsuits, brought during the policy period, which were related factually to a class action lawsuit filed before the term of the policy, were each separate claims. Thus, even though the later claims were consolidated with the class action, the court held that the later lawsuits were separate claims covered by the policy. There is no unifying theme for determining whether a claim relates back to another claim and this issue should be examined on a case-by-case and jurisdiction-by-jurisdiction basis. However, it is good to keep in mind that claims may be excluded (or covered) because they relate to other claims made before or after the policy period.
CONCLUSION
Without a claim arising out of a wrongful act, coverage is not triggered under a D&O policy. Even when a claim made arising out of a wrongful act, the claim must be made during the policy period and for a wrongful act of an insured person or organization. Even then, it may be excluded if the claim relates to another claim which was made before the policy inception. Of course, if a claim is made after the policy period ends but can relate back to a covered claim within the policy period, the insurer may be obligated to cover that claim as well.
Source : insurance.com