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Liability Insurance

What is a Carve Back in Insurance?

The term Carve back is a common term that you can notice with liability insurances. With the D&O insurance plans or E&O policies, there is a separate column for carve backs in the insurance brochures. Knowing about the overruling or carve-back aspects is as essential as knowing the exclusions and inclusions. 

Terms that matter in understanding an insurance policy – There are multiple terms in the insurance glossary that most people are not familiar with. Terms like carve back, cross-liabilities, etc., are essential to understand if you consider purchasing D&O insurance. The policyholder can get benefitted through the carve-back provisions of the D&O policy. Carve-back provisions help in making the coverage boundaries of the insurance wider and helping the policyholders make the most of the insurance benefits. 

Cracking the concept of carve-back

What is a carve back? To put it into simple words, carve back in an insurance policy means the provision to overrule an exception. Most people are aware that insurance policies have several coverage exclusions to set the boundary of the policy benefits. But it is crucial to note here, there are exceptions to these “exceptions” as well. The carve-back clause present in the insurance contract defines the specific conditions through which the coverage exceptions can get overruled. 

Why do you need to have an idea?

When you buy insurance, why do you care to inquire about the coverage inclusions and exclusions? As it comes beneficial while filing a claim. Similarly, knowing about the carve-back provisions in the insurance policy makes you aware of your insurance-related rights. You would not have to face a claim rejection for an unjustified reason if you are aware of the conditions that overrule the exception that causes a coverage denial. 

Carve backs in the D&O policy

The D&O liability insurance caters to the officers and directors in an organization and covers the legal expenses when there are any legal allegations brought against the policyholder. The allegations can be brought by those affected by the wrongful action of the policyholder. The director or officer has to defend themselves at the court, which is quite an expensive procedure. The D&O policy pays for it alongside meeting the penalties and settlement fees. So, you can understand the extensiveness of coverage and exclusivity in the claims. The insurance companies have defined certain aspects that fall outside the coverage domain, which is also crucial to note for the policyholders. The carve backs relate to these exclusions defined in the insurance brochure. There are some provisions that overrule the defined exclusions in the coverage. 

Carve back for insured versus insured claim

The insured v/s insured claim in the D&O liability policy is quite significant. Under this, the insurer defines the boundary in the coverage regulations. When there is a legal conflict between two policyholders in the same company, the D&O coverage will not be applicable. But there is a condition (carve back) that overrules the exception. If the legal allegations are brought by a former director or officer to another officer, then the insurer will cover the expense. 

Derivative shareholder action carve-back – This one can also get treated as the insured versus insured exclusion example for applying the carve-back. The board members in the company have duties that help bring profits to the company. It also includes the shareholders, for which the shareholders can legally sue the director for a wrongful action. If the individual breaches the fiduciary duty and the company management does not take a step against it, the shareholder can bring a lawsuit. It is known as the derivative shareholder action. As the shareholder also falls under the insurance, there is an exclusion for D&O coverage. But the carve-back provision in the insurance policy overrules it, making the claim effective. 

Covid-19 impact on the carve-backs – Besides the mentioned carve-back provisions on the excluded coverage aspects, the existing pandemic conditions have brought new overruling grounds or carve-back options. The new claims filed in the court for the pandemic require more analysis to make the carve-back provision definite.

Certain aspects that determine the exclusion overrule

Why are there overruling provisions on the already defined exceptions? Because there is always room for alteration in the insurance scopes for the evolving business environments. For example, the definition of a simple term like “loss” can be more than one when considered from the liability insurance perspective. Such nitty-gritty and technical aspects in the insurance determine the overruling provisions in the practical scenario. 

The need of knowing the exclusions

Besides having an idea of the carve-backs, it is necessary to note the coverage exceptions. Unless you know the exception, how would you understand the overruling parts? Here are some common exception cases in the D&O liability policy that you should keep in mind.

  • Actions that focus on personal gain – Fraudulence and intentional act to misuse the power vested on the corporate designation that brings personal profit are out of the coverage provisions. The insurer will not approve the claim or reimburse any money in such cases.
  • Defamation-related charges – Slander and defamation charges do not get insurance backup. Here also, you can find a hint of the carve-back provision. Some insurance companies offer partly coverage for such claims as part of reputation management indemnity. 
  • Other exclusions – Breach of the service contract, claims for actions taking place outside the policy tenure, claims that could be covered by other insurances, etc.

A note for those buying the policy

Before purchasing the D&O policy or any policy for that matter, get a clarified idea of the coverage, exclusions, and carve backs of the insurance. It helps in the selection of the insurance and makes it effective. You can connect to an insurance broker to resolve the queries or get in touch with a representative of the insurance company.

Connect to PlanCover

The leading insurance broker company in India, PlanCover, offers D&O liability insurance for companies and businesses. You can find the right insurance plan that suits the requirements after clarifying all the doubts related to the insurance. Connect to the team now. 

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