When applying for directors and officers insurance, your Massachusetts business will likely be asked a “warranty question.” Insurers word this question in various ways, but it generally asks whether the applying company is aware of any facts, circumstances or situations that could lead to claim against the insurance policy. Any issues disclosed are typically excluded from coverage, which can make this question challenging to answer. Here are some tips on how your business may want to approach this question.
Options For Answering Your "Warranty Question" When Applying for Directors and Officers Insurance
Ask Whether the Question is Fair When Renewing a Policy
If your business is asked this question during a policy renewal, don’t immediately offer an answer. Instead, first ask your insurance agent if the company must answer the question.
In some situations, businesses that are renewing directors and officers insurance -- and not making any changes to the policy -- don’t have to answer this question. Companies normally have a right to expect continuous coverage when a policy is renewed, so this question sometimes becomes irrelevant. If an issue wasn’t known when a policy was first issued, it frequently will be covered by that policy and all renewed policies until coverage is ended or altered.
Asking whether your business has to answer this question when renewing a policy isn’t a guarantee that it won’t have to answer. When presented with this argument, though, your insurer may relinquish and agree that the warranty question can be skipped. It’s worth at least asking about.
Answer the Warranty Question Fully and Honestly If Your Business Must
In most cases, businesses must answer the warranty question. Be prepared to answer it if your business is applying for a new directors and officers liability insurance policy, or increasing an existing policy’s limits. Additionally, some Massachusetts insurers will insist on the question even if your business is only renewing a policy.
When answer the question, provide a full, complete and honest answer. Don’t leave anything out even if you’re afraid of not having coverage. While any incidents or issues you mention likely won’t be covered, failing to answer fully and honestly could compromise the entire policy. If your business misleads or doesn’t disclose information it’s required to, your insurer may not only refuse to cover an incident but revoke all coverage.
Have a Strategy for Answering the Warranty Question
It’s not just enough for you, as the person running your business, to quickly write an answer to the warranty question. If a question about coverage arises in the future, your business may need to be able to prove that it provided a full and honest answer. To do this, your business will need a strategy for answering.
There are many ways your business might arrive at an answer. Here is one that might work well:
When you come to the warranty question, send out an official memo or email to all company officials. (Make sure this is sent in a written form, so there’s a record of it.)
In the memo, explain the importance of this question, and why it should be answered fully and honestly.
Request that every company official considers the question and then replies with any pertinent information they might have.
Compile all responses into an answer on the directors and officers liability insurance application.
With this approach, your company may have a way of showing that it both provided a sufficient answer to the warranty question, and that the company did its due diligence when applying for directors and officers liability insurance.
(Because every situation is unique, this strategy should be reviewed with your company’s insurance agent and legal team. These are only general guidelines and may need to be adjusted in certain scenarios.)
Talk with a Massachusetts Agent When Applying for Directors and Officers Insurance
If you have questions about a warranty question or any other parts of a directors and officers insurance policy, talk with your business’ independent insurance agent. They’ll be able to explain the questions that Massachusetts insurers as on applications, as well as the language contained within policies.