The attorney was with a high risk insurance carrier letting his coverage lapse in 2016. He wrongly assumed that it would not be a big deal to get his prior acts back after more than a year and ½.. He had been paying around $7,000 annually to cover his past acts. L Squared was able to find an insurance carrier that was willing to ‘repair’ his past acts, but now the cost for this was going to be $17,000 annually. According to what he told the L Squared Agent he wrongly assumed that even though he let his coverage lapse in 2016, his past acts would continue to be covered. He stated that no one had told him of the consequences of not maintaining continuous ‘claims-made’ coverage.
Lawyers Professional Liability Insurance policies are written on a ‘claims-made’ form in the US not an ‘occurrence’ form.
Most property & casualty insurance policies are written on an ‘occurrence’ policy form. With an ‘occurrence’ policy form, the policy that is on the risk at the time that a covered act ‘occurs’ is the policy that the claim will be settled under, regardless of when the act is reported (barring policy provisions and/or statute of limitations issues). For most property losses, ie such as an auto accident, it is very easy to determine the occurrence date. Same goes for the casualty side of that auto accident; there is a very precise date and time as to when the act occurred. The time frame to report, adjust and settle most of these claims is fairly short.
Professional Liability Insurance, as well as some other casualty insurance lines do not always have short claims cycles for many reasons:
1. The time between when the act occurred and when it is known can be months or years apart.
2. Or the “act” might span many years (ie pollution), where determining which policy/company is responsible for providing coverage for the covered act can be very difficult to determine.
3. With the time between when the act occurred and the knowledge of the actual claim to report being long. The laws and/or court rulings may have changed. This makes it difficult for an insurance carrier to know their true loss costs for any given policy year if an ‘occurrence form’ were used. If an insurance carrier cannot predict its true claims costs for a given line of business, it is unlikely the insurance carrier or industry will provide insurance at a cost that the insurance consumer would purchase. In the 80’s during the liability insurance crisis; this was part of the problem. The availability for casualty insurance for certain lines of business dried up and/or became extremely costly because much of it was written on an ‘occurrence form’.
‘Claims-made’ insurance such as professional liability insurance for lawyers, accountants, doctors, title agents and other malpractice lines came into being. With a ‘claims-made’ form in its purest form, the covered act needs to occur and the claim needs to be reported in the same policy period. For many lines of business such as professional liability insurance or malpractice insurance this is not a workable solution. Hence using of a “prior acts date” or “retroactive date” solves this issue.
Prior Acts Date
With a prior acts date on a ‘claims-made’ form, the policy that is inforce when the covered act is reported or the ‘claim is made’ is the policy and insurance carrier that will provide the coverage, providing that the covered act occurred after the prior acts date on the current policy.
With ‘claims-made’ coverage, if the insured allows coverage to lapse there is no insurance policy to report future claims to for past acts, even though there was coverage inforce at the time the act occurred. This brings up 2 responsibilities for the insured with ‘claims-made’ coverage:
1. The insured needs to maintain continuous ‘claims-made’ coverage. A coverage “gap” with ‘claims-made’ insurance usually results in the resetting of the prior acts date to the inception date of the new ‘claims-made’ insurance policy, thus wiping out coverage for all past acts.
2. The insured needs to make sure that at renewal, especially, when changing insurance carriers, that the prior acts date that originated on the inception date of 1st continuous ‘claims-made’ coverage is maintained on future renewals and is not shortened.
L Squared Insurance Agency specializes in ‘claims-made’ coverage for Lawyers, Accountants, Title Agencies, and Dentist. Give us a call or send us an e-mail if you have questions or issues about your ‘claims-made’ policy coverage or prior acts date.