Your agent tells you you’re all set with your malpractice coverage. Nothing for you to worry about. Non or lack of full disclosure can sink your coverage. Insurers do have ways to eliminate your coverage if there is a lack of full disclosure.
From cancellation at inception to policy rescission, your insurer has 6 different was to get off a coverage risk. Rescission is the most extreme tool that an insurer has available, but there are other more likely tools that an insurer uses:
1. Cancel Coverage at Inception--Many policies allow the insurer to revoke or cancel coverage during the 1st 30 to 60 days at the inception of coverage. Normally this is for a material issue not known at the effective date of coverage. Sometimes a conditional binder was issued at inception subject to conditions being met. If conditions are not met, coverage is cancelled. Backdating coverage 30 to 60 days after this happens is nearly impossible or very expensive.
2. Denial of Claim-This can be because the alleged act was not covered under your malpractice policy or excluded. One of the leading causes of claim denial is prior knowledge. Depending on the reason for denial, the insure may proceed with one of the other tools to eliminate coverage.
3. Midterm Cancellation—A material change to the risk generally allows an insurer to cancel midterm. Without a material change coverage must continue until expiration.
4. Non-Renewal—Prior to the renewal cycle an insurer with giving the proper State required notice to the insured, informs the insured in writing that the insurer will not be renewing coverage. The reasons for this can range from changes in the exposure, insurer withdrawing from the market, underwriting reasons, claims experience, or a variety of other reasons.
5. The 30-Day (60-Day) extension—When the dates to give proper notice for the non-renewal at expiration date are missed, the 30-Day extension provides the insurer with the needed notice for the non-renewal to normally meet State requirements. Coverage extensions almost always will require further explanation with another insurer.
6. Rescission—Generally a rescission results from a material misrepresentation by the insured, i.e. not telling the insurer on the application about claims activity that has occurred or a disciplinary action taken against the insured. Often this issue is discovered when a claim is reported, and the claims department finds non-disclosed material issues that should have been known to the insurer at the time coverage was originally underwritten or renewed. Often the insurer goes to court getting a declaratory judgement that allows the insurer to remove coverage back to a certain date. This date likely is the original policy’s inception date. With claims-made coverage this results in the insured losing all past acts coverage. Including past acts coverage from other insurer policies. The insurer gives your money back for the coverage, but with claims-made coverage a rescission is the worst-of-all-worlds. There is no good way to get past acts coverage back after a rescission. It is as if the insured never had malpractice insurance.
Once an insurer uses one of these tools, insureds usually find that their insurance costs increase dramatically, and the insured potentially has uninsured claims. Any of these actions can put your financial health at risk.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080