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In a 2017 article, I issued a cautionary tale about the dangers inherent in switching professional liability insurers. Specifically, I warned that so-called full prior acts coverage does not offer complete protection unless accompanied by continuity in the prior knowledge date in the existing policy.
To be clear, professional liability insurers (which write policies on a claims-made or a claims-made-and-reported basis) do not typically provide coverage for claims that are foreseeable at the time of transition and, therefore, there can be gaps in coverage even where back-to-back policies are in place.
This is a different result than when dealing with occurrence policies (like auto, homeowners or other general liability policies) which do not contain such prior knowledge provisions (that can be embodied in the insuring agreements or in the exclusions).
These provisions have been routinely upheld, and coverage denials affirmed for attorneys otherwise protected under their professional liability policies. See, e.g., North River Insurance Co. v. Leifer, 2023 WL 2978970 (2d Cir. 2023) (summary order).
There are several potential remedies to avoid this result. One is to poll all attorneys in the firm at the time of the switch in an effort to determine whether any claims are foreseeable and, if so, to report them to the outgoing carrier under the discovery clause in that policy; however, that process is only as good as the absolute truthfulness of those attorneys.
A second is to purchase an extended reporting period endorsement (“ERP”) which, as the name suggests, allows for reporting of certain claims to the outgoing carrier at a later date; however, that option is usually very expensive (and, in fact, can cost multiples of the last premium depending upon the length chosen for the ERP) and is usually bypassed because the whole point of the switch is to save money.
A third remedy is to procure a new policy which contains an endorsement providing for the prior knowledge date of the outgoing policy to be carried forward and adopted in the new policy; however, until recently, we had never seen such an endorsement.
Now, the third option has appeared in the marketplace, but prospective insureds should do their due diligence before jumping in.
In particular, they should be certain that the new policy has not only full prior acts coverage but also the aforementioned continuity of the outgoing prior knowledge date (and not merely some acknowledgment by the insured that it is unaware of any potential claims or has reported the same to the outgoing carrier).
The date in question is generally the date of inception of the first policy with the outgoing carrier, but can sometimes be triggered upon the renewal of each and every new policy.
The latter result is obviously more restrictive of coverage, and insureds should be fully aware of that fact if they procure such policies. This has been more of an issue since 2009, at which point New York prohibited late notice disclaimers unless the insurer can establish prejudice (i.e., late notice disclaimers in the context of multiple policies have become rare but prior knowledge disclaimers when based on annual triggers have become more commonplace).See Insurance Law § 3420(a).
Finally, it should be noted that, regardless of all of the foregoing, insureds must always complete applications or renewal applications for their professional liability policies—including attestations to the fact that they are unaware of any existing claims or circumstances that could give rise to a claim—and so are always subject to the possibility of rescission in the event of a material misrepresentation in that respect.
The bottom line is to be vigilant in applying for and purchasing malpractice insurance and, thereafter, in reporting claims and potential claims. This will minimize the risks inherent in maintaining or switching such insurance.
Jeffrey Steinberg is senior counsel at Dorf Nelson & Zauderer where his practice focuses on professional liability coverage and defense. Opinions are the author's own.
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