No one insurance policy covers all liability risks. Risk managers expect to purchase several types or layers of insurance to cover different types of insurance liabilities, to provide sufficient limits for a catastrophe loss, or to provide coverage over multiple policy years. They may be surprised to learn however, that what they thought was a comprehensive and seamless program in fact contains glaring but avoidable gaps.

Consider the following: 

1. A social networking site for minors purchases an insurance policy which contains a “Technology, Media and Professional Services” component defining “Professional Services” as “providing advertising services for others, for a fee.” The same policy also includes a D&O component which excludes coverage for any claim “based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving the rendering or failing to render professional services.” “Professional services” is not defined in the D&O component. Consumers complain that the site contains inappropriate content, and the State Attorney General sues the site for false advertising, alleging it misrepresented its efforts to protect minors from inappropriate content. The insurer denies coverage under the Technology, Media, Professional and Services component of the policy because the claim does not relate to the site’s “paid provision of advertising to others,” i.e., the claims do not allege covered “Professional Services” (the defined term).  It also denies coverage under the D&O component on the grounds that the “professional services” (the undefined term) exclusion extends to all services involved in operating the website. Surprisingly, the liability does not fall under either policy because the coverage grant in the professional services coverage was not broad enough to pick up the services the court found were excluded under the D&O coverage.

• A “claims-made” D&O  insurer issues a policy that provides coverage for a “Claim” (usually defined as a written demand or a lawsuit) first made during its policy period. It agrees to renew the D&O coverage but adds a new “Specific Event Exclusion” endorsement to the renewal policy. The endorsement excludes a number of matters relating to the company’s business which have been raised in the media as potential liabilities or which are the subject of government inquiries. None of the excluded matters, however, qualify as a “Claim” under the expiring policy. Unless all of the matters which are the subject of the exclusion can be anticipated and reported as adequate notices of circumstances under the expiring policy, they will fall between the cracks.

A publicly traded company purchases several layers of excess D&O coverage, all of which are described by the insurers as “follow-form,” to ensure adequate coverage in the event of a serious claim. When the company is sued for securities law violations, it discovers  that several of the excess policies have specific choice of law provisions and require arbitration of coverage disputes in Bermuda or London (the primary does not).  It also learns that not all polices provide that they are triggered if the underlying limits are exhausted with a combination of payments by the insurer, the insured or a DIC insurer. Some of the excess policies in fact contain additional exclusions not found in the primary form. To obfuscate matters further, one of the excess policies states that its coverage is “no broader than” any of the underlying policies. And to add insurer to injury, after the primary insurer pays its limits, an excess insurer disagrees with the payments made by the primary insurer and refuses to recognize that the primary insurance is exhausted and its excess insurance is now triggered. On paper, the company has enough insurance to deal with the lawsuit. Accessing that insurance is another matter entirely.

So don’t assume that a comprehensive or successive insurance program provides seamless coverage.  Keep in mind the potential “gaps” and make sure the policies are drafted to avoid them.