No one knows exactly when, but at some point, some senior executive liability underwriter must have moved to an errors and omissions division and discovered the professional liability policy contained no “continuity date” limitation. Errors and omissions underwriters soon began using the prior and pending litigation exclusion by endorsing the language onto the policy or inserting it into the policy’s exclusion section. The most often used exclusionary language read:
“…arising out of … from any claim, arbitration, mediation, litigation, administrative proceeding (including disciplinary and licensing), bankruptcy or regulatory proceeding or investigation, pending as of or commenced prior to the inception date …”
Some policies even went so far as to use language as limiting as:
“…arising out of … from any claim, arbitration, mediation, litigation, administrative proceeding (including disciplinary and licensing), bankruptcy or regulatory proceeding or investigation, pending as of or commenced prior to the first inception date …”
“First inception date” was commonly a defined term in these policies. To clarify the extent of or limitation on coverage, the insured was required to go to the policy’s definition section. The definition may have read:
“First inception date means the date set forth in Item “X” of the Declarations as the inception date of the first …. Professional Liability Policy that (i) provides or provided the same or essentially the same coverage as this policy, and (ii) was issued by us or any other member company of XXXXXX to the named insured or its predecessors and was continually renewed by us or any other XXXXX member company through the inception date of this policy; or such other date specified in Item “X” of the Declarations as such.
Some insurers hid similar limitations within their forms without disclosing the prior and pending limitation in the quote. This not only creates claims problems for insureds, it places agents’ and brokers’ errors and omissions policies in danger; possibly having to respond to an excluded claim.
Note also the conspicuous absence of the term “known” from the prior and pending litigation wording. Even unknown suits, administrative proceedings or other such matters would be excluded if they predate the prior and pending date. This potential gap is explored below.
Worse, errors and omissions underwriters, unlike executive liability underwriters, almost always made the prior and pending (continuity) date the same as the inception date of the first policy written with that insurer – even if there was prior coverage. Professional liability underwriters would not “back-date” the prior and pending litigation date, creating a potential coverage gap. This additional provision meant that the insured professional now had to satisfy four coverage triggers:
- The claim against the insured had to be first made during the policy term;
- The wrongful act had to take place subsequent to any retroactive date;
- The claim had to be reported to the insurance company during the policy term or any automatic extended reporting period; and
- The service of the suit must occur after the prior and pending litigation date; even if the insured had no knowledge that it is coming. If the “P/P date” is the inception date, this could cause problems.
The necessity of meeting all four requirements creates a subtle yet potentially devastating coverage gap. Even if the insured has continuous coverage with a many-year past retroactive date, the prior and pending litigation exclusion is absolute and does not require the insured to have actual knowledge that a suit was filed prior to the current policy’s inception for such action to be excluded from coverage. If a suit were filed the day before renewal, for example, but not received until after renewal, the prior and pending litigation date may act to exclude coverage for such suit even though the claim is made during the policy term, even if the insured was unaware of any act or error that may give rise to such a suit.
Basic extended reporting periods (BERP’s) were created to fill this gap. BERP language in the expiring, non-renewed policy generally allows the insured between 30 and 60 days (most common is 60) to report a “claim.” Such an extension should fill the gaps created by the above scenario, but it depends on the definition of a “claim.” If a “claim” is defined simply as a “demand for money or services,” then the suit might be covered by the prior policy under the BERP provision. If, however, the definition of a “claim” requires the notice of claim or service of suit be received during the policy period, then the claim may be denied by the prior carrier and will likely be denied by the new/current carrier.
Further, there is no chance for coverage from the prior carrier should the claim be submitted after the 30 or 60 days provided by the BERP-allowable extension. This scenario is likely if the insured submits the suit/claim to the current carrier and does not submit it to the prior carrier until denial of liability is received from the new carrier (which may take the entire extension period to receive).
The definition of a “claim” and the basic extended reporting period provisions govern whether or not such a coverage gap exists. A thorough understanding of terms and policy provisions is necessary before coverage is moved from one carrier to another if the prior and pending litigation date is advanced by the new carrier.
Thus far I have seen only three policy forms require the insured to have actual knowledge of a suit or administrative proceeding in order to be considered a “claim;” unlike the above example which only required the filing of a suit or proceeding. This, having actual knowledge, is the solution that would eliminate all potential gaps in coverage and make the form 100 percent consistent with the warranty contained in the application.
As obvious as it seems to insert the word “known” into the definition, some carriers have taken a different path – backdating the prior and pending litigation date to match the prior acts date. While this fixes the coverage “gap” issue, it exacerbates and further highlights the problem created by not simply inserting the term “known.” There may be unintended consequences of backdating the prior and pending date without inserting the word “known;”including theoretically covering a claim scenario that could not possibly happen in the real world.
More problems are created when the professional liability underwriter and/or the agent is unaware that their policy contains a prior and pending exclusion that automatically advances to the renewal date at subsequent renewals.
Problems A ‘Plenty
Agents are well aware that incidents that may lead to claims should be reported to the carrier once there is knowledge of such incident. “Claims made” policies allow this and certain policy provisions require the reporting of such incidents.
However, the incident reporting provision has developed into a potential trap for the insured; a trap from which a claim denial is possible simply because an incident was not reported in the manner prescribed by the policy.
The next post details common incident reporting provisions and spotlights seven potential problems created by the policy wording. Proof once again that not all “claims made” policies are created equal; and each must be studied to assure there is no coverage gap.
About the Author
Frederick J. Fisher, J.D. is the CEO of E.L.M. Insurance Brokers and is the Executive Vice-President of Insurance Specialty Group’s Professional Liability Practice. For the past 35 years, Fisher has been actively involved in underwriting and placing Professional Liability accounts or in the adjustment, investigation, and resolution of Professional Liability Claims. He has spent his entire career working with “claims-made” insurance policies and their evolution.
Fisher, a founding member of the Professional Liability Underwriting Society (PLUS), has been the senior technical advisor for The Professional Liability Manual published by the International Risk Management Institute since 1989. He testifies regularly as an expert witness in cases dealing with the duties and obligations of professionals as well as on coverage and “claims-made” issues.
Fisher can be reached at 310-322-1301 or by email at email@example.com.
A Course on Occurrence Versus Claims Made Forms
On February 25, 2010, the Insurance Journal Academy of Insurance hosts a Webinar on the differences between occurrence and claims made coverage forms. During this class, participants will learn:
- The coverage triggers for both “occurrence” and “claims made” forms;
- The four legal theories applied to determine when an injury or damage occurs;
- What BERP’s and SERP’s are, when they should be used and their limitations; and
- The problems created when a client moves from one coverage trigger form to another.
Click here to register for this class.