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Discovery Period in D&O policies

Directors and Officers (D&O) insurance policy is necessary for businesses to protect their directors and officers. This liability policy comes with an important feature known as the Discovery Period which is defined as the time after the expiry of the policy in which the insured party can identify and report any loss that occurred during the policy period. The Discovery Period for D&O policies is usually between 60 to 90 days.

The Discovery Period, also known as the Extended Reporting Period (ERP) in Directors and Officers (D&O) insurance policies, allows insured individuals or entities to report claims that arise from wrongful acts committed during the policy period but are made after the policy has expired.

The Discovery Period in a D&O insurance policy will be clearly mentioned in the policy document. The duration of the discovery period is between 60 to 90 days with no additional cost. 

Key aspects of the Discovery Period

As mentioned, the Discovery Period allows the insured in a D&O policy to report a claim for any lawsuit filed against then during the policy period.

 Here are some key points about the Discovery Period in D&O policies:

  1. Purpose: The Discovery Period provides additional time beyond the policy expiration for reporting claims. This is particularly important for claims-made policies, which are common in most liability policies, particularly D&O insurances. Claims-made policies require that both the wrongful act and the claim occur within the policy period unless an extended reporting period is in effect.

  2. Activation: The Discovery Period can be automatically included in the policy or can be activated by the insured by paying an additional premium. The terms and conditions for activating the Discovery Period vary depending on the insurer and the policy.

  3. Duration: The length of the Discovery Period can vary. Common durations range from 60 to 90 days for automatic periods, with options to purchase extended periods of one to several years. Longer Discovery Periods usually require additional premiums.

  4. Coverage: During the Discovery Period, the insured can report claims arising from wrongful acts that occurred during the original policy period. It does not cover new wrongful acts that occur after the policy expiration.

  5. Importance: The Discovery Period is essential in situations where there is a change in the company's risk profile, such as a merger, acquisition, or the company ceasing operations. It ensures that directors and officers remain protected against claims that surface during these significant events, through the policy has since expired.

  6. Claims-made nature: D&O policies are typically written on a claims-made basis, meaning the policy that is in effect when the claim is made responds to the claim, regardless of when the wrongful act occurred, provided it falls within the policy's coverage period. The Discovery Period extends this reporting capability beyond the policy's expiration date.

Example of Discovery Period usage

Suppose a company has a D&O policy that expires on December 31, 2023. A wrongful act by a director occurs in November 2023, but the claim is not filed until February 2024. If the company has a Discovery Period of six months, they can report this claim within the Discovery Period, even though the policy has expired.

Considerations before buying an extended discovery period

Evaluate needs: Assess the potential for claims arising after the policy expiration. Companies undergoing significant changes should carefully consider purchasing an extended Discovery Period.

  • Understand costs: Be aware of the additional premiums associated with extending the reporting period and weigh them against the potential risks of unreported claims.

  • Review policy terms: Understand the specific terms and conditions of the Discovery Period in your D&O policy, including how it is activated and any limitations that apply.

The Discovery Period feature in a D&O policy is relevant especially in cases where the director or officer of an entity has failed to renew the policy or decide not to renew the policy before its expiry and a claim comes up or if they have forgotten to report a claim that occurred during the policy period.

It is important to also know about the percentage of defense costs that will be covered in case of any lawsuit that is filed during the discovery period of the D&O policy. For this it is important to go through the policy document in detail.

Discovery Period in a D&O policy is a vital feature that provides extended protection to directors and officers by allowing additional time to report claims for wrongful acts committed during the policy period.

An insurance broker will provide all the relevant details of the Discovery Period and other features in a D&O policy that will protect the entity.

We at Zen Insurance Brokers assist in choosing an insurance policy with clauses suited to your requirements. Choose your insurance policy wisely. Get in touch with us for any assistance.

 

Disclaimer:

Zen Insurance Brokers is an IRDAI registered broker which facilitates quick and adequate insurance broking services. We deal with only regulator approved products of insurers. We do not underwrite the products.

 



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