D&O excess policy needs to spell out exceptions from primary policy

If an excess insurance policy follows the form of a primary policy, and the primary policy offers an option that extends the claims reporting period by a year, the insured is entitled to the same option under the excess policy, said Ontario’s top court.

The take-away for directors and officers (D&O) underwriters from Cronos Group Inc. v. Assicurazioni Generali S.p.A.,  is to make sure that if an excess D&O insurance policy follows the form of the primary policy, all exceptions to the primary policy must be clearly spelled out in the excess policy.

Otherwise the courts read in options that aren’t expressly stated in the excess policy.

Cronos Group Inc., a cannabis company, purchased a primary Executive and Corporate Securities Insurance Policy issued by AXA XL to protect its board and directors against claims made against the company. It also held an Excess D&O Liability Policy issued by Assicurazioni Generali S.P.A., which covered the same policy period.

The primary policy covered a liability limit of up to $5 million for a premium of US$243,000. Generali’s excess policy offered an additional $5 million of coverage for an additional premium amount of US$243,000.

AXA’s primary policy included an Optional Extension Period (OEP) option, allowing the insured to extend the coverage period beyond the expiration date of the primary policy within 30 days of its expiry, should the insurer decide not to renew the policy. The OEP covered claims discovered during the original policy period (from Feb. 27, 2019 to Feb. 27, 2020). In the primary policy, the premium for exercising the OEP option was US$486,000.

Condition 2 of Generali’s excess policy states it is “subject to the same terms, conditions, limitations, and exceptions (except as regards the premium, the amount and limits of liability, any deductible or self-insurance provision, the obligation to investigate and defend and the renewal agreement (if any)) as are contained in the primary policy.”

The OEP option is not identified as an exception in Condition 2, and the excess policy does not contain any mechanism to calculate premium for an OEP option.

In January 2020, Cronos sought to renew both the primary policy and excess policy through its newly appointed broker Aon Reed Stenhouse Inc. and its U.K. affiliate. On Feb. 11, 2020, Aon provided Cronos with quotes from both AXA XL and Generali to renew both polices.

However, on Feb.24, 2020, Cronos announced it would delay its 2019 Q4 and full-year earnings releases. In response, Generali and AXA XL withdrew their quotes to renew the policies, which were due to expire a few days later on Feb. 27, 2020.

On Feb. 26, 2020, Cronos exercised its OEP option in the primary policy, and negotiated a 13-month extension with AXA. The amendment extended the term of the policy period to Mar. 27, 2021, giving Cronos coverage for claims premised on wrongful acts occurring after the expiry of the original policy period.

On Mar. 11 and 12, 2020, two securities class action claims were commenced in the state of New York naming Cronos and two of its officers as defendants. The wrongful acts alleged concerned the restatement of the 2019 financial statements, which pre-dated the expiry of the excess policy.

About two weeks later, Cronos told Generali it would similarly be exercising the OEP option on its excess insurance policy. It delivered a bank draft to Generali in the amount of CAD$704,700, the Canadian-dollar equivalent of twice the annual premium for the excess policy (US$243,000)

Cronos calculated this premium based on the same ratio between the OEP and basic premiums in the primary policy: twice the policy’s basic premium.

But Generali destroyed the bank draft and told Cronos on May. 27, 2020 the OEP option did not exist in the excess policy. On Mar. 31, 2020, it rejected the U.S. claims on the basis that there was no language in the excess policy to support Cronos’ right to elect the OEP.

A lower court found Cronos’ right to the OEP in the excess policy existed because the excess policy simply followed the form of the primary policy, with certain exceptions. The OEP was not listed as an exception.

The Court for Appeal of Ontario agreed, simply re-stating the findings of the motions judge:

“[Generali’s] submission [that the excess policy had no OEP option and that such option could not be incorporated into the excess policy by reference to the primary policy] is not supported by a plain reading of the terms of the primary policy and the excess policy. The OEP in the primary policy clearly states that if the policy is not renewed, the insured shall be entitled to the extension upon payment of the additional premium….

“The excess policy follows form with the primary policy ‘(except as regards the premium, the amount and limits of liability, any deductible or self-insurance provision, the obligation to investigate and defend and the renewal agreement (if any)).’

“Notably, Condition 2 of the excess policy does not exclude the OEP option. Accordingly, I find that the OEP is included in the excess policy.”

Feature image courtesy of iStock.com/lambada