‘Prior or Pending Litigation’ and ‘Prior Acts’ exclusions are both policy conditions that reference the time period before the policy begins and specify what the policy won’t cover. In this article, we review the distinction between these terms and discuss the implications of a Prior Acts Exclusion.
Summary
- Both ‘Prior or Pending Litigation’ and ‘Prior Acts’ exclusions reference the time before the policy begins and specify what the policy won’t cover.
- ‘Prior or Pending Litigation’ and ‘Prior Acts’ exclusions are very different in nature.
- Buyers and brokers need to understand the distinction between these two terms, what to look for in a policy, and the implications, especially for the Prior Acts Exclusion.
Prior or Pending Litigation exclusion
A policy with a Prior or Pending Litigation exclusion will not cover any litigation that is in process or that the insured has been notified of, or is aware of prior to the policy inception date or the ‘prior/pending date’. Unless specified otherwise, the timing of the wrongful act that gave rise to the claim is not at issue, just the timing of the claim itself or notice or knowledge of it.
Can you imagine an insurance company signing on to provide property coverage for a building that’s already on fire? Neither can we! Under a claims made policy, such as D&O or EPLI, insurance companies won’t offer coverage for litigation that an organization already knows about. Or, if the organization has recently switched insurance companies, about which they should have notified their previous insurance company.
Prior or Pending Litigation Exclusion Example:
Company ‘A’ decides to purchase a D&O insurance policy for the first time on December 1, 2018. They warrant to the insurance company that they don’t know of any circumstances which could give rise to a claim. Included within their insurance company’s standard policy is a ‘Prior or Pending Litigation’ date exclusion – it specifies December 1, 2018 – the date that first D&O policy came into effect.
Months later, on June 30, 2019, a lawsuit names the directors and officers of the organization. The lawsuit isn’t new. It was filed several years ago against the company and their insurance company was notified at the time. This is however, the first time the directors and officers are named.
Are the directors and officers covered under their new D&O policy?
Even though the directors and officers didn’t know of a claim where they were named when they first purchased the D&O policy, the insurance company denies the claim. The prior or pending litigation exclusion is absolute. The date that the original claim was filed against the company was prior to the date found in the prior or pending litigation exclusion.
Prior Acts Exclusion
With the Prior Acts exclusion, a policy will not cover a claim if the event, the wrongful act, that gave rise to the claim occurred prior to the policy inception date or the ‘prior acts exclusion date.’
Prior Acts Exclusion Example:
Company ‘A’ decides to purchase a D&O insurance policy for the first time on December 1, 2018. They warrant to the insurance company that they don’t know of any circumstances which could give rise to a claim. While the company had several red flags in their underwriting profile, they are able to secure a D&O policy containing a Prior Acts Exclusion – it specifies December 1, 2018 – the date that first D&O policy came into effect.
Months later, on June 30, 2019, a lawsuit names the directors and officers of the organization. In contrast to the previous example, here the lawsuit is new. This is the first time the directors and officers or anyone in the company is aware of it. The allegations include breach of fiduciary duty and misrepresentation to shareholders relating to an acquisition made two years ago.
Are the directors and officers covered under their new D&O policy?
No. The insurance company would decline any claims relating to prior acts.
Applying the prior acts exclusion
Buyers and brokers need to be careful with this exclusion. A Prior Acts exclusion may be added as an endorsement to the policy. Alternatively it may be part of the base wording in lieu of a warranty statement. Read the Prior Acts Exclusion carefully to understand when the exclusion is effective and thus, the prior acts that are excluded.
Beware that Prior Acts exclusions are so broad that even future acts will be excluded if those acts are attributable to or arising out of past acts. The wording may look like this :
This Policy shall not cover any Loss in connection with any claim alleging, arising out of, based upon, or attributable to any wrongful act(s) committed, attempted, or allegedly committed or attempted prior to X date
While the insured may be thinking they have only given up coverage for past acts, in the wording above the exclusion also applies to coverage going forward if “attributable to any wrongful act committed” as shown in the sample wording above.
Put simply, read policy wordings carefully. Even with a potentially significant premium savings, think twice about giving up past acts coverage.
