Prior acts along with a ‘claims-made’ policy form are two of the most misunderstood concepts with malpractice insurance. It is a shame, because this misunderstanding costs many professional s millions of dollars in coverage every year. There are two basic property and casualty insurance forms; the ‘occurrence’ policy form and the ’claims-made’ policy form. So what is the difference and what does this have to do with prior acts?
‘occurrence’ policy form
Most property and casualty policy are written on an ‘occurrence’ policy form. Your homeowners, personal auto, business auto, business owner’s coverage, and most commercial packages are normally ‘occurrence’ policies. With an ‘occurrence’ policy the carrier that is on the risk at the time the act occurred is responsible for the claim regardless of when the claim is reported. Barring statute of limitation and coverage issues a straight forward concept. This policy form works well for exposures that the ‘occurrence’ date is easy to determine and the time between when the incident that caused the claim and the claim is reported is relatively 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. The time between when the act occurred and the knowledge of the actual claim to report can be very long. The laws and/or court rulings may change those laws in between those dates. 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 claim costs for a given line of business, it is unlikely the insurance carrier or industry will provide insurance. In the 80’s, during the liability insurance crisis; this was part of the problem. The availability for casualty (liability) 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 workable. Hence using of a ‘prior acts date’ or ‘retroactive date’ solves this issue with ‘claim-made’ coverage.
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.
Depending on the insurance carrier:
1. The past acts coverage may be a date on the declarations page labeled ‘Retro Active Date’ or ‘Prior Acts’ date.
2. The policy form may contain language in the form that refers to the date on the declarations page.
3. In some cases the policy form is written in such a way that if it is not amended, that the policy is considered ‘Full Prior Acts’.
4. It also may be written in a way that it only provides coverage for the current policy year. If this is the case, there should be endorsements attached to the policy that amends the coverage for the appropriate ‘prior acts’ date.
5. The ‘prior acts’ endorsements can be for individual and/or for the firm.
6. Finally there are many different combinations of how ‘prior acts’ coverage is addressed by different malpractice carriers using some or all of the above.
The important thing to remember is that once a ‘prior acts’ date is established, to make sure that that ‘prior acts’ date is maintained on all future polices. This is true whether you stay with the same malpractice carrier or switch to a new malpractice carrier.
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.