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May 1999
Think you have full prior acts coverage? Think again!
How sure are you that your professional liability insurance policy includes prior acts coverage? A Southeastern law firm was sure, until it got stuck with three uncovered claims totaling more than $1 million. The following story about this unfortunate firm should serve as a wake-up call to law offices everywhere.
What happened
A small firm in the southeast had gone without a claim for more than 20 years. It had been with its current insurance company for the past five years. In February 1994, one of the firm’s clients was handed an adverse judgment exceeding $1 million, and in response, the law firm requested a hearing on the client’s behalf.
In the meantime, the law firm applied for renewal with its professional liability carrier. At no point prior to completing the application did the firm’s client relate to any attorneys in the firm displeasure concerning the services being provided. Accordingly, the firm answered “no” to the question in the insurance application asking whether any attorneys in the firm knew of any prior act that could give rise to a claim. The application was accepted and the policy was bound in June 1994.
Meanwhile, the hearing went forth as scheduled, and the court affirmed the original judgment in excess of $1 million. In September 1994, the firm received its first claim ever, a $25,000 demand unrelated to the above circumstances. Then, in December 1994, the firm received yet another claim, this one for $50,000. Finally, in January 1995, the client to whom the adverse decision was dealt filed a malpractice suit against the law firm for $1 million plus.
In February 1995, the firm’s insurance carrier informed the law firm that a misrepresentation had been made on the firm’s renewal application, and hinted that coverage might be declined. In June 1995, the insurance company returned the firm’s premium and declared the policy to be void based on a breach of warranty.
This left the firm with three uncovered claims in excess of $1 million. In addition, the firm had a lot of explaining to do the next time it applied for professional liability coverage.
Why was coverage denied?
To answer this question, it is necessary to look closely at the prior acts exclusion included in almost every professional liability policy – probably yours.
Examine your policy and you will likely find that it excludes coverage for claims arising from a circumstance known to you before the effective date of the policy if you “knew or could reasonably have known” that a claim would result from that circumstance. This “could have known” or, alternately, “knew or had a reasonable basis to believe” wording is a serious limitation in your policy. It amounts to a huge gap in prior acts coverage.
In the preceding horror story, the insurance company said that the firm could have reasonably foreseen that the adverse judgment would lead to the claim. In the same vein, your insurer may say that your firm could “reasonably foresee” that any case you lose may lead to a claim.
If you don’t report every single lost case to your insurance company, you may be vulnerable to the same charge of breach of warranty and then left exposed to millions of dollars of uncovered damages.
How can this coverage gap be avoided?
Simple. Those who want full prior acts coverage should be insured by a company whose policy only excludes prior acts “…which you knew would give rise to a claim against you in the future.”
Carriers with the “could have foreseen” language written in their policies can arbitrarily decide whether a policyholder should or could reasonably have known or foreseen that a prior act might lead to a claim, and thereby deny coverage.
As insurance professionals who specialize in the unique professional liability risks faced by lawyers, we would be happy to help you find a carrier that bases its exclusion on fact. If you didn’t know that the incident would give rise to a claim, you should be covered, plain and simple. Ask us to find you an insurer that has no intention of contesting what you could or should have known.
Many companies claim to offer “full prior acts” coverage. Read your insurance policy carefully and see if you may have overlooked this important coverage gap. !
Disclaimer: “Perspectives” is published as a service to lawyers. While the information contained herein is believed to be reliable, readers are advised to consult their own legal and insurance counsel for assistance in applying it to their unique situations.