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Full prior acts coverage: fact or fiction

Like most professional liability insurance policies, lawyer's malpractice policies are written on a claims-made and reported basis. Put simply, for coverage to apply a claim must be made against the Insured during the policy period.

Pursuant to this definition, attorneys may believe they will have coverage for any of their past services regardless of when the alleged act occurred, irrespective of where they were working at the time the professional services in question were provided. However, in order to determine if proper coverage is in place in the event of a claim, you need to know the answers to two questions:

(1) Who is a Named Insured and who is Insured under the policy, and

(2) Is the policy written to cover "full prior acts" or does it specify a "retroactive date"?

Some examples of how one company defines a Named Insured, as well as an Insured are as follows:

The Named Insured is defined as the individual, partnership, professional association, limited liability corporation or corporation named in item one of the declarations.

The Insured is:

* The Named Insured and any predecessor firm;

* Any individual or professional corporation who is or becomes a partner, officer, director, stockholder or employee of the Named Insured, but solely while acting within the scope of duties on behalf of the Named Insured;

* Any individual or professional corporation who was a partner, officer, director, stockholder or employee of the Named Insured or predecessor firm, but solely while acting within the scope of duties on behalf of the Named Insured for which a fee inured to the Named Insured;

* Any individual or professional corporation designated "counsel" or "of counsel" to the Named Insured, but solely while acting within the scope of their duties on behalf of the Named Insured for which a fee inured to the named insured;

* Or the heirs, executors, administrator and legal representatives of each Insured in the event of death, incapacity or bankruptcy, but solely with respect to the liability of each Insured as otherwise covered by this Policy.

Typically a "full prior acts" policy provides coverage for any current, past or future lawyers, employees, designated counsel, "of counsel" attorneys and predecessor firms of the law firm that is purchasing the policy (Name Ensured). Although this language seems to imply that an independent contractor would be provided coverage, most policies do not. Policies often define predecessor firms as "any individual or entity engaged in the practice of law to whose financial assets and liabilities the Named Insured is the majority successor in interest."

In the event of a claim under this definition, if the services the attorney provided were not on behalf of the Named Insured or a predecessor of such, coverage would not be provided.

For example, if Attorney X joined Jones & Smith in June 2000 and a claim is filed against the attorney in December 2000 for services he/she provided and concluded while at another law firm (not considered a predecessor) before June 2000, there would not be coverage under his new firm's policy. To insure for these types of pre-hire claims, Jones & Smith would have to request an endorsement be added to its policy that would provide coverage for professional services by Attorney X on behalf of his or her former firm. Often a policy's language is written as such:

The definition of the Insured of this policy is amended by the addition of the following: "Insured means any current partner, officer, director, stockholder, or employee of the Named Insured listed below arising out of that lawyer's legal services on behalf of the below entity, providing there is no other insurance available."

It should be noted that if the attorney's former firm is still in existence, the claim should be tendered under that firm's policy, therefore the aforementioned language is not necessary.

In addition to understanding who an Insured is under the policy, it is important to determine if the policy is written with full prior acts or with a retroactive date.

With a full prior acts policy, coverage is provided for the Named Insured and its predecessor, if applicable, from the starting date of the original firm. Make sure, however, to review how the policy defines "predecessor" firms. If the former firms do not fall within the definition, have the carrier add the name of the former entities that are to be insured under the policy.

Rather than providing full prior acts coverage, some insurance companies issue policies with a retroactive date. A retroactive date precludes coverage for claims caused by wrongful acts that took place before a specific date, regardless if the claim is made during the policy period. The purpose of a retroactive date is to eliminate coverage for possible wrongful acts known or unknown to an Insured prior to the policy inception. For instance, few insurance companies grant full prior acts coverage with no retroactive date to a first-time buyer of professional liability insurance -- such as a sole practitioner who, after a number of years without coverage, decides to purchase a policy. Usually the retroactive date is established from the start date of the original firm or from the first date that uninterrupted or continuous claims made coverage has been provided.

As you can see, full prior acts coverage is not crystal clear. To cloud matters even more, in the past some carriers provided career acts coverage, which would give coverage to all attorneys in the firm from the date they began practicing and irrespective of who they worked for. These types of policies are now rarely used, and if so, the career acts provision is typically excluded from the policy.

Ahern, RPLU, is president of Ahern Insurance Brokerage, an independently owned insurance brokerage firm specializing in professional liability insurance for the legal community as well as directors and officers. He can be contacted by e-mail at brian.ahern@sddt.com.

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