LEGAL MALPRACTICE INSURANCE PRIOR ACTS COVERAGE

LEGAL MALPRACTICE INSURANCE PRIOR ACTS COVERAGE

 

Prior acts coverage is the most important part of the legal malpractice insurance policy, and the part most misunderstood by attorneys. This Q&A will rectify that.

What Is Prior Acts Coverage?

Coverage for claims that arise out of insurable events, which occurred prior to the current policy’s inception date.

For example, if your current policy runs from 01/0120/21 – 01/01/2022, and you’re served with a complaint on 05/01/2021, which arises out of legal services that you provided before 01/01/2021, that claim will be eligible for coverage, only if your policy has prior acts coverage back to the date(s) that you provided the legal services.

Why Is Prior Acts Coverage Necessary?

Because legal malpractice insurance policies are “claims made and reported”, which means that a policy must be in effect on the date that the attorney committed the underlying error or omission, and the date the claim is made against the atty., and the date the atty. reports the claim to the insurer, to be eligible for coverage.

Further, most legal malpractice claims are filed 1 – 4 years after an attorney commits a ‘wrongful act’. Therefore, an atty. whose policy doesn’t have prior acts coverage – coverage for claims that arise out of legal services provided prior to the current policy’s inception date – won’t be covered for most claims.

How Do I Obtain Prior Acts Coverage?

By renewing your policy every year. You obtain another year of prior acts coverage at each renewal.

For example, if your first legal malpractice insurance policy took effect on 01/01/2021, it would have no prior acts coverage, i.e., no coverage for legal services you provided before that date.

If you renew on 01/01/2022, then your renewal policy will have one year of prior acts coverage, back to 01/01/2021. If you renew the following year, the policy will start on 01/01/2023, and have two years of prior acts coverage, back to 01/01/21.

Similarly, if you bought your first policy on 01/01/2000, and renewed it every year since then, then your current policy, which took effect on 01/01/2021, has 21 years of prior acts coverage, back to 01/01/2000.

What Happens If I don’t Renew My Policy?

If your policy lapses, even for a day, you’ll lose all of your prior acts coverage, and have to start over with a new policy, which won’t cover any work you did prior to the effective date (if your coverage lapses unintentionally, ask your insurer to reinstate it).

Does Prior Acts Coverage Affect My Premium?

Since most malpractice claims are filed 1 – 4 years after an attorney commits a ‘wrongful act, few attorneys incur a claim that will be covered by the policy in the first year that they have coverage, but are more likely to do so in future years, as their earlier cases mature, and they take on new ones.

Therefore, your premium increases at each of the first four renewals (years 2 – 5 of coverage), to reflect the additional year of prior acts coverage that you obtain, and the increased risk that you’ll need it, i.e., that you’ll incur a claim that will be eligible for coverage.

The premium increases stop after your fifth year of coverage, because the SOL tolls on cases from four+ years ago, which offsets the risk of a claim arising out of more recent cases. Thus, your prior acts exposure – the risk of incurring a claim that will be covered by the policy – stops increasing.

These increases generally cause the premium to roughly double by the sixth year, independent of any other factors that may affect it, i.e., a change in practice areas, policy limits, etc. The largest increase, which is about 35%, is at the first renewal. Subsequent increases are about 15% – 20%. 

Can I Waive Earlier Years of Prior Acts Coverage, When the SOL To File A Claim Has Expired?

No. You can’t ‘pick and choose’ your prior acts coverage. You automatically accrue an additional year of it, each time you renew your policy.

As mentioned, you’re charged only at the first four renewals. Your premium may increase at subsequent renewals, i.e., due to inflation, etc., but not due to accruing an additional year of prior acts coverage. 

Why Doesn’t ‘Prior Acts Coverage” Ever Come Up With My Other Insurance Policies?

Because only professional liability policies – legal malpractice, medical malpractice, directors & officers, etc. – are underwritten on a claims-made basis.

Your auto, homeowners or renters, and business insurance (property, general liability, etc.), are all written on an occurrence basis.

These policies cover claims that arise out of incidents that happen during the policy period, regardless of when the claims are made. For example, if your auto policy runs from 01/01/2021 – 01/01/2022, and you rear-end a car during this time, you’ll be covered if the other driver sues you, even if it’s not until years later, long after your policy has expired. This is true even if you don’t renew or you cancel your policy the day after the accident.

So, a claim will be eligible for coverage by an occurrence policy, if the policy was in effect on the date the underlying incident occurred.

Professional liability policies were written on an occurrence basis until 1964, when the insurance industry concluded that the occurrence policy was inadequate for professional liability insurance policies, due to the 1 – 4 year delay in claims being filed.

As a result, when professional liability insurers were deciding what premium to charge a lawyer, etc., they had to forecast a) the likelihood that one or more of the lawyer’s clients would discover an injury and file a claim against the lawyer after the policy had expired, and b) the costs they would incur to resolve such claim(s).

Their forecasts were usually inaccurate, so the premium they had charged often failed to properly reflect the risk they had assumed by providing coverage. In other words, they were paying out too much money to resolve claims relative to the premiums they had charged, and were therefore either losing money or not earning enough profit.

Insurers thus sought an alternative to the occurrence policy, which would provide greater certainty that no claims would be made after an insured’s policy period ended.

The claims-made policy is that alternative. Once the policy period ends, no other claims are eligible for coverage under that policy. Any claim filed after that, can be covered only by the renewal policy, and then only if that policy has prior acts coverage back to the date(s) the underlying legal services were provided.

 

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