In recent articles, we discussed the differences between claims-made and occurrence policies, as well as why organisations should be aware of them. This time, we’ll concentrate on claims-made policies because any business that buys a claims-made policy must understand prior acts coverage.
To understand the importance of prior acts coverage, we must first understand claims-made policies. If you need startup insurance, the most common policies you’ll need to purchase are errors and omissions policies, which are often claims-made.
So, let’s learn more about claims-made policies, prior acts coverage, and why you should have them.
Key Takeaways
- Prior acts coverage is an insurance policy feature that covers claims made on insurable events that occurred before the policy was purchased.
- Prior acts coverage is often sold as part of liability insurance, which protects companies against legal consequences for certain actions they undertake that unwittingly cause harm or damage to others.
- Insurance companies that provide prior acts coverage usually provide a retroactive date at some point prior to the start date of the coverage period.
- The insurance company will then cover any claims made for incidents that occurred after the retroactive date, even if they occurred while the business or entity in question was insured by another carrier.
Prior Acts Coverage vs Claims-Made Policy
Prior acts coverage can be contrasted to claims-made policy. When you purchase a claims-made policy, the insurer will cover any claims that happened and were reported during the policy period. A claims-made policy will cover the insured if both a claim and the event that triggered the claim occur while the insurance policy is active. With a claims-made policy, it is important to correctly renew your policy to ensure that your coverage has no gaps.
To ensure that you are protected for acts that occurred before you got your coverage, you will need to purchase prior acts coverage. For example, if a malpractice claim does not arise in the same year as an act that mistakenly caused injury or damage to others (which is common), a claims-made policy will not cover it.
What is Prior Acts Coverage?
Prior acts coverage is an insurance policy feature that covers claims related to insurable events that occurred before the policy was purchased. This simplifies insurance matters for liability policyholders who change insurance providers.
Understanding Prior Acts Coverage
Prior acts coverage is typically sold alongside liability insurance to shield companies from legal consequences from certain activities they provide that unintentionally cause injuries or damages to others. For example, malpractice insurance may cover legal expenses and damages if a patient sues a medical professional for providing negligent care. Since these claims can take time to adjudicate, a company could end up making a claim for an action it committed a year or more prior.
Insurance companies that offer prior acts coverage usually provide a retroactive coverage date, or a date in the past that is some point prior to the start date of the current coverage period. With prior acts coverage, the insurance company will cover any claims filed for events that occurred after the retroactive date until the point of active coverage (even if the events occurred while the business or entity was covered by another provider’s insurance policy). The retroactive coverage date sets the limits of prior acts coverage.
The Importance of Maintaining Continuous Coverage
Every professional liability insurance coverage has a “prior acts date.” This is essentially the starting point after which representations and activities will be considered as covered in the future.
Obviously, the best way to avoid potential gaps in coverage is to ensure that your organisation maintains continuous coverage with your insurer, so that no matter how many policies you purchase, they all refer back to the original prior acts date.
This way, regardless of how many years have gone after the first prior acts date, the current policy will cover claims arising from events that occurred prior to the year in which the claim is filed and reported, as long as the incident occurred after the initial prior acts date.
However, there are situations when changing providers is in the best interest for your company, for example, better pricing or more comprehensive coverage. In such cases, you may experience coverage gaps because your new insurance will have a prior acts date that begins when your previous carrier’s policy expires. This is a perfect example of when you would need to purchase prior acts coverage to cover work completed prior to the prior acts date of your new policy.
Switching insurance providers? Use this checklist to make sure your coverage stays uninterrupted:
How to Avoid Gaps in Coverage When Switching Insurers.PDF
Example of Prior Acts Coverage
Medical malpractice insurance costs vary greatly from state to state and are determined by the type of practice a doctor has. Policies explicitly state their effective dates and the risks they will cover. In other words, the policy will cover any claims filed within the coverage period for any actions made during that time. Without additional coverage, a doctor who switches malpractice insurance carriers at the start of the year to take advantage of lower premiums would face a problem if a claim emerged in March for a procedure performed the previous year in June.
If the doctor purchases a new malpractice policy that includes prior acts coverage with a retroactive date prior to June 1 of the previous year, the new coverage will cover the claim. When insured parties renew their policies on a regular basis, most claims-made policies automatically apply a retroactive date to the start date of coverage. As a result, a doctor insured by such a policy would have no problem filing a claim for a four-year-old case under a policy that the practice had continuously renewed for the previous five years.
Some insurers offer prior acts coverage without a retroactive date. These insurance cover any claims made within the coverage period, regardless of when the action giving rise to the claim took place. Insurers often avoid providing full prior acts coverage to individuals or businesses who have not previously purchased liability insurance, assuming that such clients have waited until they perceive a heightened risk of one or more claims.
Key Considerations when Seeking Prior Acts Coverage
When evaluating insurance policies with Prior Acts Coverage, consider the following factors:
- Retroactive Date: Know when the retroactive date is in the policy to determine which previous acts are covered.
- Claims History: Be ready to provide a detailed claims history, as insurers may ask for it when customizing coverage.
- Coverage Limits: Examine the limits of liability for past incidents. Check if these limits are adequate to manage potential risks based on your professional history.
- Transition Between Policies: When changing insurance carriers, timing is crucial. Make sure there are no gaps in coverage to keep claims from falling outside the policy.
- Negotiations with Insurers: Do not be afraid to negotiate for better terms. Some insurers may be more flexible about the retroactive date, potentially backdating coverage based on the insured’s history.
In summary, Prior Acts Coverage not only protects professionals against unforeseen liabilities resulting from past actions, but it also plays an important role in risk management strategy planning. Recognizing its importance and effectively incorporating it into insurance plans can give invaluable protection against the risks of professional practice.
What Does it Mean to Have No Insurance?
To have no insurance means you are not protected against financial losses or medical expenses resulting from accidents, illness, or property damage. If such events occur, they can cause considerable financial difficulty.
What Is the Meaning of Prior Policy?
Prior policy is a type of policy that covers incidents that occurred prior to the policy’s issuance. It is mostly applicable to past liabilities that are legally addressed after the policyholder purchases the policy.
What are the Top 3 Types of Insurance?
There are three main types of insurance: property, liability, and life insurance. Property insurance covers damage or loss to property, whereas liability insurance protects against financial loss as a result of legal claims. Life insurance offers financial protection to beneficiaries following the policyholder’s death.
What Is Meant by Reinsurance?
Reinsurance is insurance for the insurance firms. It is a way of transferring part of the financial risks that insurance firms bear when insuring cars, homes, individuals, and businesses to another company, the reinsurer.
What are the 5 Types of Life Insurance?
The five main types of life insurance are term life insurance, whole life insurance, universal life insurance, variable life insurance, and final expense life insurance. Each type provides varying levels of coverage, benefits, and premium options.
Conclusion
In conclusion, prior acts coverage is a crucial safeguard for professionals and businesses operating under claims-made policies. It ensures protection against liabilities stemming from past actions, even when insurance providers change. By understanding how retroactive dates work and maintaining continuous coverage, organizations can better manage risk and avoid costly gaps in protection. Investing in the right prior acts coverage is not just a smart move—it’s essential for long-term stability and peace of mind.
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