PHIL’S CORNER: Prior Acts – the 2nd Trigger of Coverage
Phil’s Corner is a special column from OAMIC’s President & CEO Phil Fraim.
We have made an effort to make sure policyholders have an understanding of a claims-made policy, on which professional liability is written. The easiest means to do so is to focus on the major differentiations from an occurrence-based policy.
What is known as the “first trigger” of coverage in a claims-made form is that a policy must be in effect when the claim is first reported. This makes continuity of coverage critical. If coverage lapses, is discontinued at renewal or is terminated for a reason such as nonpayment, a new claim cannot be made under that particular policy.
It is incorrect to assume if you no longer have coverage, but did at the time when the act or omission is alleged, that the once-existing policy would respond. As noted above, the expired policy will not respond to a new matter. This would be an occurrence-based policy, but not a claims-made policy.
Even though theoretically plausible, it is not realistically possible under a claims-made policy for someone to be uninsured for a length of time, e.g., 5 years, then buy a policy and expect coverage to apply back over those uninsured 5 years. The prior acts date limitation would prevent that possibility.
The “second trigger” of coverage is referred to as a prior acts date or retroactive date. This date will be listed on an endorsement, or sometimes on the declarations page, within a claims-made policy. In order to qualify as a covered claim under the policy, the alleged act or omission must fall within the prior acts date listed.
If limits are increased on subsequent renewal policies, it is possible that more than one prior acts date will be listed. The new, higher limit applies only to acts or omissions from that date forward, with this being detailed on the endorsement. Any allegation of an act or omission prior to that date would fall under the previous limit. If the limit has been increased more than once, the endorsement would show a date range specifying which limit applies based upon when the allegation is alleged to have occurred.
Special attention should be given to the prior acts endorsement (the second endorsement listed on OAMIC policies) where dates for limits corresponding to the allegation date are listed. It is incorrect to assume that when limits are increased that they apply all the way back to the first prior acts date. Consider the scenario where a $200,000/$600,000 (per-claim/per-year aggregate) limit has existed for five policy years. On the sixth year the policy is renewed, the per-claim limit is increased to $2 million. The $2 million limit would apply only to claims where the act or omission is alleged to have taken place after the new limit is in effect, (i.e., during or after that sixth policy year).
Professional liability insurance is important in today’s world. Equally important are adequate limits and understanding which set of limits apply to a specific claim situation. If you have questions, do not hesitate to give us a call for further discussions regarding the matter.