What Is Full Prior Acts Coverage in Insurance?
When you hear the phrase “prior acts” or “full prior acts coverage” from an insurance broker they are talking about a feature in a claims-made policy form.
Claims made policy forms are a type of policy structure that is used for Directors and Officers, Errors & Omissions, Employment Practice Liability, Cyber, and other forms of management and professional coverage. You’ll even see some claims made policies when it comes to product liability insurance.
You may be more familiar with the more common structure of a liability policy is known as an occurrence policy form. Occurrence forms are common for general liability, auto liability, and umbrella liability.
The key difference between an occurrence policy form and a claims-made form is how the policy will respond to a claim based on when that claim took place.
In an occurrence policy form, the policy that was in place when the claim happened or occurred will be the policy that pays the claim. The exception to this is regarding products and completed operations which is the subject for another post.
In a claims-made policy form, the policy that is in effect when the claim is presented – or made to the insurer is the policy that will respond.
And this is where it gets a little sticky because of something called the retroactive date which is the focus of this video.
When you take out your first claims-made policy – whether that’s a cyber policy or D&O or E&O the proposals will indicate the retroactive date. If there is no retroactive date, the policy will give you what is known as full prior acts.
So, what is a retroactive date?
It’s essentially a cut-off date of what claims will be accepted down the road. Most often the retro date will be the inception date of your first policy. What that cut-off does is say that any acts that took place before this date are not going to be covered moving forward.
This of course is problematic, especially if you’ve been an ongoing business and not previously purchased coverage for D&O or Employment Practice Liability as an example.
The problem is that you may not know what has happened in the past that could give rise to a claim down the road.
Here’s an example of employment practices.
A former manager in your company tended to be flirtatious with some of his or her subordinates. It never got to the point, in your mind, of sexual harassment; but one day a situation with this manager got a little too uncomfortable for you, and your fire them.
A year later your insurance agent recommends EPLI or employment practice liability insurance and you purchase it for the first time. You think this is a good idea based on your experience with that former manager. The policy you buy has a retroactive date of the inception or effective date of the new policy.
About 6 months after you buy that policy, an employee who had worked under the terminated manager comes forward to complain about her experiences with that manager and later brings a lawsuit for sexual harassment and a hostile work environment.
You file the claim with your EPLI insurer, only to find out it’s not covered. Why?
What’s the solution? Ideally, you should attempt to secure any claims-made policy form with full prior acts. Having a retroactive date acts as an exclusion to bar claims which occurred in the past.
In my experience, it’s not always easy to obtain full prior acts coverage on some policies. When it comes to Cyber insurance, many carriers do offer full prior acts which I believe is a must-have since any number of issues can arise before you purchase your first policy that may later give rise to a claim.
One last point, as you renew a claims-made type policy that started with a retroactive date, it’s important to carry that date forward to each renewal. So if your first claims-made policy was say purchased on 4/1/2012 that date should appear on each renewal moving forward – even if you change insurance companies. When you break or reset that date you are giving up coverage for acts that may be lurking in the past. I’ve seen it too many times during a coverage audit for a new client where this has occurred and it’s usually due to a business owner working with an unskilled broker that doesn’t understand the complexity of the claims-made policy marketplace.
The bottom line is this
Insurance is complex and claims-made policy forms contain nuances that demand expertise. D&O, E&O, Employment Practices, Cyber, Fiduciary, and other policies are claims-made forms. You should be working with a skilled and experienced broker that understands those nuances and can craft the right protection for you and your firm.