(This is the ninth of a ten-part series highlighting significant coverage issues in agents’ E&O policies. Take a look at your E&O policy. If it includes the wording described below or something similar, you may need an E&O makeover. Contact Gunnar Kephart at IIAT Advantage E&O at 800.880.7428)
Exclude Claims or Incidents Known at Inception by Any Insured (Including an Employee)
Look for this wording:
“The coverage under this policy does not apply to any claim based on acts, errors or omissions that took place prior to the effective date of this policy, if any insured knew or could have reasonably foreseen that such acts, errors or omissions might be expected to be the basis of a claim.”
Agents sometimes switch E&O carriers for one reason or another, but doing so may expose an agency to uninsured losses. The E&O carrier wants to be sure that it won’t be asked to cover a claim that has already occurred and is known to the insured. To avoid that possibility, most E&O policies contain “prior knowledge” exclusions. These exclusions differ from one policy to another with significantly different potential outcomes.
One E&O policy excludes a claim made during each policy period if any insured knew, prior to the inception of the policy, about the incident that causes the claim. For example, if one of your employees made a mistake last year and was afraid to tell you about it, and if that mistake were to result in a claim against your agency this year, the claim may be excluded. This provision requires that you consider one of the following two actions before switching to this policy and at each renewal: (1) ask each owner, officer and employee if he or she is aware of any incident that could give rise to a claim, and trust that they are telling the truth; or (2) purchase the extended reporting provision on the expiring policy.
Other E&O policies contain prior knowledge exclusions that are less restrictive. A majority of policies only apply the exclusion to the first policy purchased with the carrier as a new policyholder. For example, one policy excludes claims made against the agency only if an owner, partner or officer knew about the incident prior to the inception of the first policy written by that company.
Another policy excludes claims if “the insured” does not have actual or constructive knowledge of any circumstances or wrongful act which could reasonably be expected to result in a claim.” Reference to “the insured” means the exclusion would only apply to the person who knew about the incident and not other persons who did not.
If your E&O policy excludes claims or incidents known by “any insured,” especially if the exclusion applies at each renewal, it might be a good time to find another carrier with a less restrictive exclusion.