Prior acts and the claims-made policy form are two of the most misunderstood malpractice insurance concepts. This misunderstanding costs professionals millions of dollars in lost 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 why is the ‘prior acts’ so important?
Occurrence Policy Form
Most property and casualty policies 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. Barring statute of limitations issues with an ‘occurrence’ policy the insurer that is on the risk at the time the act occurred is responsible for the claim regardless of when the claim is reported. 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. Maintaining future coverage for past acts coverage is not necessary.
Malpractice Insurance Problems with the Occurrence Policy Form
Professional Liability Insurance, as well as some other casualty insurance lines do not always have short claims cycles:
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 insurer to determine their true loss costs for any given policy year if an ‘occurrence’ form were used. If an insurer cannot predict its true claim costs for a given line of business, it is unlikely the insurer or the insurance industry will write this insurance line. 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 in part because much of it was written on an ‘occurrence’ form.
Professional liability ‘Claims-made’ insurance for lawyers, accountants, doctors, title agents and other malpractice lines came into being because of the above issues. With the purest ‘claims-made’ 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’ to cover past acts 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 insurer that provides coverage, assuming that the covered act occurred after the ‘prior acts’ date on the current policy. Once coverage expires so does the insurer’s obligations to cover unreported claims.
Each insurer shows the prior acts date in different ways:
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 an individual and/or for the firm.
6. There are many different combinations of how ‘prior acts’ coverage is addressed by different malpractice insurers using some or all of the above.
The important thing to remember is that once a ‘prior acts’ date is established, make sure that the ‘prior acts’ date is maintained on all future polices. This is true whether you stay with the same malpractice insurer or switch to a new malpractice insurer.
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 insurers, 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.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080