Many insurance companies ask a “warranty question” whenever businesses purchase a new directors and officers insurance policy. If you have a Vermont business that’s buying D&O insurance, everyone involved in the policy-buying process should be aware of and prepared for this question.

When Getting Directors and Officers Insurance, Will My Vermont Business Have to Answer a “Warranty Question?”

What is a “Warranty Question?”

A warranty question can take several different forms, and insurance companies frequently have their own way of wording the question. Regardless of how it’s worded, however, the question generally seeks any information a business has about situations or circumstances that might result in a claim against the new directors and officers insurance policy.

Information that’s divulged in answering this question is frequently excluded from the policy’s coverages, which makes any warranty question challenging. Businesses generally must answer honestly, but they don’t necessarily want to share information that isn’t required.

Does My Vermont Business Have to Answer Any Warranty Question?

In most cases, Vermont businesses have to provide a full and honest answer to any warranty question that’s asked. There are certain situations where this question might be successfully challenged, though.

Most notably, businesses that are renewing an existing D&O insurance policy without altering the policy’s coverages might be able to challenge any warranty question that’s asked. Businesses typically can expect continuous coverage when renewing coverage without making changes, and this expectation may render a warranty question irrelevant. If a potential issue wasn’t known when a policy was initially purchased, the issue is often covered by all subsequent renewals unless coverage is terminated or changed.

If your business is simply renewing coverage, you might be able to avoid answering any warranty question that’s asked. If the business is changing coverages or purchasing a new policy, you’ll probably have to provide an answer. You can try to challenge the question, but your chances of successfully doing so are slim.

How Can My Business Answer a Warranty Question?

Assuming your business has to answer a warranty question, you’ll want to have a plan in place for how the question will be answered. A quick email sent by one representative to the business usually won’t suffice. Instead, you ought to be prepared to generate a thorough and complete answer.

There are many ways your business can provide such an answer, and employees, insurance agents or consultants might have some specific suggestions for your business. The following is one strategy that may work well depending on your business’ situation:

1. Prepare an official written memo that explains the warranty question, it’s importance, and the need to give an honest and complete answer

2. Send this memo to all of your business’ leaders via an official channel that’s used by everyone in a leadership position

3. Ask all leaders who receive the memo to provide any relevant information they have, and ask those that don’t have any information to reply stating as much.

4. Compile the responses into a complete answer, and submit this answer to the insurance agent or carrier.

The benefit of this approach is that everything can be traced if there’s ever a question whether your business conducted its due diligence. Should the insurance company ask, you can show that business leaders were asked to provide information and the information provided was passed onto the insurer.

(This general approach may need to be adapted for your business’ situation. Your business’ legal team and an informed insurance agent who specializes in D&O insurance may be able to help make any adjustments that are necessary or design a more appropriate strategy.)