Claims Made Bites: Absolute Exclusions Are, Well…Absolute

Directors & Officers Liability policies contain exclusions that are necessary and reasonable. Nobody expects a D&O policy to act as a substitute for General Liability, Tech E&O, Cyber, or Intellectual Property coverage.

Carriers add exclusions to make that abundantly clear.

Brokers need to understand these exclusions and explain them to their clients.

But what happens when these clarifying exclusions are written in an “absolute” manner?

Even insurance professionals can miss the nuance of absolute exclusions, and the results can be disastrous, both for the broker providing the guidance and the reputation of the carrier providing the coverage.

“For” ≠ “Arising From”

Let’s take a step back and ask, “Why do carriers need to add exclusions to policies to provide clarifications in the first place?”

Consider a typical D&O definition of a Wrongful Act:

Wrongful Act means any actual or alleged act, error, omission, misstatement, misleading statement, neglect, or breach of duty committed by an Insured in their capacity as a director or officer of the Company.

We should look at this and think, “My goodness, anything and everything a director or officer says or does? What DOESN’T this cover?”

And that’s why we have exclusions!

We don’t want insureds thinking their D&O policy is a sort of stand in for all their other policies, a pseudo-General Liability policy, work comp policy, etc. The intent is to protect directors and officers without allowing the D&O policy to get dragged into every single wrongful act a business can find themselves in. This would cause the rates carriers would need to charge to skyrocket, making the entire product untenable and unaffordable.

Now, there are 2 ways generally that exclusions can be written. They can be predicated with either “for” or “based upon or arising from.” Let’s use a quick example of a common exclusion found within D&O policies: the Bodily Injury/Property Damage Exclusion.

This policy shall not apply to any claim based upon or arising out of bodily injury or property damage.
This policy shall not apply to any claim for bodily injury or property damage.

Both of these exclusions are clarifying that no, the D&O policy is not pulling double duty as the General Liability policy.

But why would some carriers choose to write their BI/PD exclusion with “based upon or arising out of” or “for”? Is one better than the other?

Yes, there is a world of difference between these types of exclusions.

A “for” exclusion is saying the carrier will not pay any claim for BI/PD. The “absolute” exclusion is saying if any claim is based upon or arising from BI/PD, then there’s no coverage.

Let’s use an example. Say a construction company carries a D&O policy. During their business operations they have a bad BI/PD claim. Scaffolding collapses and injures 3 workers and 2 pedestrians. The insured files their GL claim with their GL carrier. While this is going on, outside shareholders of the construction company are flabbergasted and incensed that such a terrible accident could have occurred. They believe that the reason the accident occurred is due to poor management. They bring suit.

If that D&O policy has a “for” BI/PD exclusion, then D&O coverage can consider the claim. This exclusion is saying that, while there is no coverage for BI/PD, there’s still coverage for claims of mismanagement, which is what this particular D&O claim is.

If that D&O policy has an “absolute” BI/PD exclusion, then there’s no coverage. No indemnification, no defense costs covered. Just nothing. Why? Because while the claim is a mismanagement claim, it arose from a BI/PD claim.

The difference between a claim exclusion written “for” a particular exposure versus one written “arising out of” a particular exposure is the difference between coverage and a denial.

Yet how many brokers are disclosing the broadness of these absolute exclusions to their clients? Unfortunately for some, the distinction between a “for” vs. “absolute” exclusion is not appreciated until the claim is denied.

Brokers:

• Pay attention to the exclusions section of your quotes, whether in the base form or added via endorsement
  • Are the exclusions written with “for” language or “absolute”?
• Disclose to your clients when absolute exclusions present themselves
  • Absolute exclusions are not just clarifying coverage. They’re taking that entire exposure and carving it out completely.
• Ask your underwriters for softer exclusion language when possible, and make sure to highlight carrier partners who are using softer, more favorable exclusionary language

Underwriters:

• Appreciate the broadness of your “absolute” vs. your “for” exclusions
  • Make sure your brokers are clear when they ask for clarity on your exclusions.
  • If a claim is denied due to an absolute exclusion, at least both you and your broker were on the same page about the nature of the absolute exclusion beforehand.
• Consider amending absolute exclusions when possible
  • Can your carrier consider D&O claims irrespective of whether or not they arose from this particular exposure?
  • Is your carrier’s stance that they do NOT want ANY part of that exposure touching the D&O policy?
• If you use softer “for” exclusions, celebrate it!
  • D&O brokers should know and appreciate your softer exclusionary language and explain it to their clients.
  • Don’t let brokers bully you for cheaper quotes against competitors who are using absolute exclusions. If it’s not apples to apples, then your broker should know those differences.

The words “for” and “arising out of” are two of the most consequential phrases in a D&O policy, but two of the least discussed. Absolute exclusions aren’t inherently wrong, but they need to be understood for what they are: not clarifications, but complete carveouts. Until brokers start treating them that way, and until insureds are fully informed when choosing between more and less restrictive policy language, the gap between what an insured thinks they have and what they actually have will keep closing at the worst possible time… when the claim is already on the table.

The author provides this analysis for educational purposes. Specific coverage questions should be directed to qualified insurance professionals and legal counsel.

Meet the Author

Lucas Roberts

Management Liability Broker, Burns & Wilcox

Lucas Roberts is an executive and professional lines specialist with experience in both underwriting and wholesale brokerage. He maintains an active LinkedIn presence, regularly sharing insights on claims made coverage developments. This blog takes a deeper dive into developments that have far-reaching consequences for the professional liability market.

You can see more of Lucas’s Claims Made Bites on his LinkedIn.