Prior Acts Coverage: What it Means, How it Works
Prior actions coverage is an insurance policy element that covers claims based on insurable events that occurred before the policy was purchased. This streamlines insurance problems for liability policyholders who move insurance carriers.
Understanding Prior Acts Coverage
Prior acts coverage is often marketed as part of liability insurance, which protects companies against legal ramifications for specific activities they engage in that unwittingly cause hurt or damage to others. For example, malpractice insurance may cover legal fees and damages if a patient sues a doctor for providing negligent care. Because these claims can take months to resolve, a company may end up making a claim for an action it committed a year or more ago.
Insurance companies that give prior acts coverage typically provide a retroactive coverage date, or a date in the past that is some time prior to the start date of the current coverage period. With past actions coverage, the insurance company will cover any claims submitted for events that occurred from the retroactive date to 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 establishes the limits of earlier acts of coverage.
Prior Acts Coverage vs. Claims-Made Policy
Prior acts coverage can be contrasted with claims-made policies. When you purchase a claims-made insurance, 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 incident that triggered the claim occur while the insurance policy is active. With claims-made insurance, it is critical to correctly renew your policy to ensure that your coverage is uninterrupted.
To ensure that you are protected for acts that occurred before you got your coverage, you will need to obtain prior acts coverage. For example, if a malpractice claim does not come in the same year as the conduct that mistakenly caused injury or damage to others (which is typical), a claims-made policy will not cover it.
Example of Prior Acts Coverage
Medical malpractice insurance prices 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 term for any actions committed 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 challenge if a claim emerged in March for a surgery performed the prior year in June.
If the doctor obtains a new malpractice policy that contains 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 consistently renewed for the previous five years.
Some insurers provide past act coverage without a retroactive date. These policies cover any claims made during the coverage term, regardless of when the conduct that caused the claim occurred. Insurers often avoid providing full prior actions coverage to individuals or businesses who have not previously purchased liability insurance, assuming that such clients have waited until they perceive a higher risk of one or more claims.