Theoretically, claims made insurance coverage applies to claims made during the policy period regardless of when the underlying acts took place. The claims made arrangement contrasts with the framework under an occurrence policy, where coverage applies according to when the underlying acts took place, regardless of when the claim is made. But even though claims made coverage is intended to apply to claims made during the policy period, there are sometimes claims made policy provisions that can preclude coverage for some or all of the past acts alleged. These coverage limiting provisions can under certain circumstances substantially limit the past acts coverage available under a claims made policy.
In an April 12, 2019 memo entitled “How Insurance Companies Try to Use Past Events to Defeat Coverage of New Claims” (here), the Barnes and Thornburgh law firm takes a look at claim made policy provisions that can limit or preclude coverage for prior acts. The memo identifies four specific ways that claims made insurers may seek to use to try avoid coverage for past events.
First, claims made policies may contain a prior knowledge exclusion. These exclusions provide that if anyone within the group of persons described in the exclusion was aware before a specified date of events that the person or persons knew could form the basis of a claim, coverage under the policy for a subsequent claim based on those events is precluded. For discussion of a claim in which a policy’s prior knowledge exclusion operated to preclude coverage, refer here. Obviously, the definition of the group whose awareness precludes coverage and the specification of the prior knowledge date can significantly affect the scope of this exclusion’s preclusive effect.
In addition, depending on the exclusion’s wording, the prior knowledge requirement may include both a subjective component (that is, actual awareness) and an objective component (that is, reasonable awareness of the possibility of future claims). The actual policy wording here matters; some versions of the exclusion preclude coverage for known facts that “could” or “might” lead to a claim, while other versions require that the known facts be “likely” to lead to a claim. As the memo notes, under the “likely” to lead to a claim formulation, “the insurance company has a heavier burden of showing that the exclusion applies because it would have to demonstrate that the potential for a claim was relatively clear based on the individual’s knowledge.”
Second, claim made coverage for prior acts can be affected by policy retroactive dates. A retroactive date provision specifies that the policy’s coverage applies only to acts taking place after a certain date. Retroactive date provisions are sometimes referred to as continuity date provisions. These provisions can restrict the retroactive reach of the policies coverage for past events. These kinds of provisions can create complications when claims assert a continuing pattern of alleged misconduct taking place over a protracted period of time.
Further complications can emerge when different layers in a multilayer insurance program have different retroactive date. The situation can arise when a policyholder adds additional layers of excess insurance over the course of several policy periods. Often, in order to protect themselves from the possibility that the policyholder is buying more insurance because of the possibility of incoming claims, the excess insurers will agree to provide the additional limits of liability subject to a past acts date that coincides with the policy inception date. These different retroactive dates can mean that in the event of a future claim alleging prior acts, the excess coverage may not be available to provide coverage for some or all of the loss attributable to the prior acts.
Third, coverage under claims made insurance policies for prior acts can be limited by a prior and pending litigation exclusion. These exclusions preclude coverage for claims pending at the time of the policy inception. For discussion of an example of a case in which a prior and pending litigation exclusion operated to preclude coverage, refer here. Complications can sometimes arise under these exclusions in the event of subsequent claims. These exclusions often are written with broad preambles (“based upon, arising out of, in any way relating to”), raising the possibility for a fight over the extent of the relationship between the prior claim and the subsequent claim and whether the connection is sufficient to trigger the preclusive effect of the prior and pending claim exclusion.
Another prior and pending claim exclusion complication that can arise has to do with previously pending claims of which the policyholder was unaware. An example of a situation in which this complication might arise is in the event of a qui tam action or False Claim Act claim. These kinds of claims often are filed under seal with the court, in order to allow the government an opportunity to investigate the claim and determine whether or not it wants to assert the claim itself. While the complaint remains under seal, the defendant may be unaware of the action’s existence. As the memo notes, at least one court has held that a qui tam action filed prior to a policy’s specified prior and pending litigation date can trigger the exclusion, because the exclusion does not require that the policyholder have knowledge of the exclusion. For that reason, it is in the policyholder’s interest for the prior and pending litigation exclusion’s preclusive effect to be limited to litigation of which the policyholder has notice.
Finally, a claims made insurer may seek to evade coverage for prior acts by seeking to rescind the policy based upon alleged omissions or misrepresentations in the policy application. Absent restrictive policy provisions, the rescission of an insurance policy can entirely void coverage, for all claims and for all persons. In more recent times, many management liability insurance policies are entirely non-rescindable except for premium non-payment. Other policies contain severability provisions limiting a coverage rescission – or the preclusion of coverage—based on an application misrepresentation solely to those persons with knowledge of the misrepresentation, with a further provision the knowledge of one person will not be imputed to any other person. These kinds of rescission restrictive provisions can substantially limit the extent to which the insurer can avoid coverage based upon supposed application misrepresentations.
If nothing else, a review of these various policy provisions show that a claims made policy’s specific terms and conditions can substantially affect the availability of coverage for a particular claim, particularly as pertains to allegations based on past events. These examples also show that the wording of the various exclusions and provisions can substantially affect these exclusions’ and provisions’ preclusive effects. The analysis of these provisions also underscores the importance for all insurance buyers of enlisting the assistance of a knowledgeable and experienced insurance advisor who can ensure either that these provisions are removed from the policy altogether or wording in a way to restrict their preclusive effect to the maximum extent possible.