Almost all lawyer’s professional liability policies include a prior knowledge exclusion.[1] Calling it an exclusion is somewhat of a misnomer because, most often, it is a coverage condition in the insuring clause rather than an exclusion in the exclusions section of the policy.

The gist of the prior knowledge exclusion is that there is no coverage for a claim based on an act or omission occurring before policy inception if the insured had reason to foresee or anticipate the claim. The knowledge standard varies by policy, as in the examples below:

  • “the Insured had no basis to believe that any such act or omission might reasonably be expected to be the basis of a Claim”[1];
  • “the insured had no basis to believe that the insured has breached a professional duty”[2];
  • “you had a reasonable basis to believe that you had committed a wrongful act, violated a disciplinary rule, or engaged in professional misconduct” or “could foresee that a claim would be made against you”[3]; and
  • “if any insured at the Effective Date knew or could have reasonably foreseen that such act, error, or omission, circumstance or PERSONAL INJURY might be the basis of a CLAIM.”[4]

The exclusion comes in two forms, which we will call Type 1 and Type 2.

Type 1

A Type 1 policy excludes coverage for claims based on acts or omissions preceding inception of the first policy issued by the insurer, assuming continuous renewal. Below is an example:

The Company agrees to pay . . . provided that . . . prior to the date an Insured first becomes an Insured under this Policy or became an Insured under the first policy issued by the Company (or its subsidiary or affiliated insurers) to the Named Insured or any predecessor firm, whichever is earlier, of which this Policy is a renewal or replacement, no such Insured had a basis to believe that any such act or omission, or related act or omission, might reasonably be expected to be the basis of such claim . . . .[5]

A Type I policy usually does not require the reporting of potential claims.[6] You may report a potential claim but are not required to. If you do, a claim that later results will be covered under the policy in place when you reported the potential claim.

This exclusion is the reason for reporting any potential claims to your existing insurer before switching carriers. A potential claim that turns into an actual one after switching normally will not be covered under the new carrier’s policy if it was foreseeable at the time you switched. However, if reported to your old carrier before switching, the claim should be covered under the old policy, even though you are no longer with the carrier. In other words, not reporting potential claims to your existing carrier before switching can create coverage gaps.

Type 2

A Type 2 policy excludes coverage for claims based on acts or omissions preceding inception of the policy in place when the claim is made.[7] Below is an example:

The Company shall pay . . . provided . . . [p]rior to the effective date of this policy no Insured had any knowledge of such Wrongful Act or Personal Injury, or any fact, circumstance, situation or incident which would lead a reasonable person in the position to conclude that a Claim was likely.[8]

The key phrase is “this policy” rather than “first policy” in the Type 1 example.

Consider the following hypothetical: after switching carriers, you miss the statute of limitations during your first policy period with the new carrier; you do not report the incident as a potential claim; the client sues the next year under your renewal policy. Under a Type 1 policy, the exclusion does not apply because the omission occurred after inception of the first policy. However, under a Type 2 policy, the exclusion applies because the omission preceded inception of the renewal policy.

In essence, the Type 2 exclusion extinguishes coverage for unreported potential claims (assuming foreseeability) every year, not just in your first year with a new carrier.[9] Every year you run the risk of creating coverage gaps by failing to identify and report potential claims, as if you were switching carriers every year. The Type 2 exclusion thus presents an increased risk to the insured.

In contrast to Type 1 policies, most Type 2 polices require the reporting of potential claims. This makes sense: if the policy extinguishes coverage for unreported potential claims at renewal, then it should make the reporting of them obligatory to minimize the chance of creating coverage gaps. However, some Type 2 policies do not require the reporting of potential claims. Such a policy creates a trap for the unwary: it leads the insured to believe there is no need to report potential claims and then extinguishes coverage for them at renewal for non-reporting.

Conclusion

Absent another overriding consideration, and assuming availability, a Type 1 policy is preferable to a Type 2 policy.

[1] XL Catlin PLLD 050 0717 at 1 § I.B.2.

[2] Selko v. Home Ins. Co., 139 F.3d 146, 149 (3rd Cir. 1998).

[3] Onebeacon Ins. Co. v. T. Wade Welch & Assoc., 841 F.3d 669, 673 (5th Cir. 2016).

[4] Executive Risk Ind. Inc. v. Pepper Hamilton LLP, 919 N.E.2d 172, 320 (N.Y. 2009).

[5] CNA G118011A (8-09) at 1§ I.A.3 (bold removed).

[6] Type 1 policies typically state the insured “shall” give notice of a claim but use permissive “if/then” language for the reporting of a potential claim. See XL Catlin PLLD 050 0717 at 1 § VII.B (“If during the Policy Period, the Insured becomes aware of a Potential Claim and gives written notice to the Insurer . . . , then any Claim subsequently made . . . arising out of such Potential Claim, shall be deemed to have been made at the time such notice was received by the Insurer.”) (italics added; bold removed); 4 William E. Wright, Jr., Law and Practice of Insurance Coverage Litigation, Claims handling—Notice of claim § 49:17 (Westlaw, June 2019 Update) (“All professional liability policies require the insured to give prompt notice of ‘Claims’ as defined in the policy. In most cases there is no obligation to report ‘potential claims,’ that is, an awareness of circumstances which may give rise to a claim. However, in the event an insured gives notice of a potential claim during a policy period, a claim subsequently filed will be considered as having been first made during that policy period.”); id. § 47:15 (authors David E. Borden & Ellen B. Van Vechten) (“While, generally, D&O policies do not require the insured to provide notice of events which suggest that a future claim may be made, insureds have the option of triggering coverage for future claims by providing the insurer with notice, during the policy period, of a circumstance which may give rise to a future claim.”); William E. Knepper & Dan A. Bailey, LIABILITY OF CORPORATE OFFICERS AND DIRECTORS § 24.08 (7th ed. 2003) (“D&O policies allow (but do not require) the insured to give notice of that potential Claim to the insurer during the policy period.”).

[7] In Berkley Assurance Co. v. Expert Group International, Inc., 779 Fed. Appx. 604 (7th Cir. 2019), the Seventh Circuit construed the following prior knowledge exclusion: “As of the inception date of this policy, no insured had any knowledge of any circumstance likely to result in or give rise to a ‘claim’ nor could have reasonably foreseen that a ‘claim’ might likely be made.” Id. at 607-08. The court held “inception date of this policy” referred to the inception date of the renewal policy in place when the claim was made, not the initial policy. Id. at 609.

[8] Markel MELA 0001 04 17 at 1 § II.A.2.b (bold removed).

[9] See Ruiz v. Bar Plan Mut. Ins. Co., 2019 WL 4145480, at *6, —S.W. 3d — (Mo. App.) (upholding denial of coverage under renewal policy based on prior knowledge exclusion for incident that occurred between inception of first policy and renewal policy); Bar Plan Mut. Ins. Co. v. Likes Law Office, LLC, 44 N.E.3d 1279, 1288 (Ind. App. 2015) (same); Ehrgood v. Coregis Ins. Co., 59 F. Supp. 2d 438, 442-45 (M.D. Pa. 1998) (same).