Some coverage exclusions are so broadly written that it can be challenging for courts to keep them in their proper place. The problem might be that insurance companies were permitted to use such exclusions in the first place.
It is a truism of insurance law that a court should not interpret or apply a policy exclusion such that it renders the coverage illusory.
With that general principle in mind, every Board member, General Counsel, and Risk Manager of a company that has Directors' & Officers' Liability coverage should pay close attention to two particular policy provisions. In some policies, it is called the "Interrelated Wrongful Acts" clause. In others, it might be a similarly worded "Prior and Pending Proceeding" exclusion. A recent decision by the United States District Court for the District of Maryland is a reminder of how these provisions, if construed as broadly as carriers often argue that they should be construed, can be quite pernicious and can nullify coverage that a policyholder would have reasonably believed it had in place.
The terms of D&O policies vary from carrier to carrier to a greater extent than most other liability insurance policies sold in the United States. That said, essentially all D&O policies are written on a claims-made-and-reported basis, which means that coverage only applies if the potentially covered claim against the insured is made during the policy period and if the insured also reports the claim to the carrier during the policy period. For a claims-made policy, the end of the policy period is (with certain exceptions not really relevant to this discussion) a hard-stop on the carrier's coverage obligations.
Often perhaps we might even say, "most of the time" the events that gave rise to the claim against the insured happened before the policy period. It's a fairly rare claim against a director or officer of a company where the alleged wrongful act results in the immediate filing of a complaint or a demand by the injured party. There's usually some lag time between the two. (For this reason, and not to get too far off-topic, it is a best practice for a policyholder to give the carrier what is called a "notice of circumstances" whenever an act or event involving an officer or director could potentially result in a claim being made against the company.) As long as the insured doesn't hide from the carrier an act or circumstance that might eventually lead to a claim or lawsuit against an officer or director, the carrier should be obligated to cover a pre-policy "wrongful act" that results in the filing of a claim or lawsuit against the insured during the policy based upon the pre-policy behavior.
But sometimes a claim or lawsuit during the policy period "relates" in some way to a previously filed claim or suit. And that's where the potentially nasty exclusions may come into play. Most D&O policies have some form of an "Interrelated Wrongful Acts" provision.
Again, language can vary, but the provision typically says that more than one claim involving "interrelated wrongful acts" will be considered one claim and that such a claim will be deemed to have been made on the first date on which the earliest such claim was made. Since a covered claim is one that is both made against the insured and reported to the carrier during the policy.