Prior Knowledge Claims: What They Are and How You May Avoid Them
The risk of prior knowledge claims is something you should keep in mind throughout your professional life as an attorney.
However, you may need to be particularly vigilant when applying for malpractice insurance
or renewing your current policy.
A single prior knowledge claim – whether actual or potential – could result in your insurance provider denying you coverage or rescinding the policy altogether.
What are Prior Knowledge Claims?
In this context, “knowledge” refers to situations where:
- You knew or should have known
- That a client has made or could have made a malpractice claim against you
The “prior” component comes into play when your knowledge of a claim or potential claim occurred prior to the effective date of your current policy.
Why Do Prior Knowledge Claims Matter?
If you have prior knowledge of a (potential) claim that took place during Policy A, you may not be able to get insurance coverage to mitigate your losses at a later date under Policy B.
To avoid that, you should notify your insurance provider whenever:
- A client makes a malpractice claim against you; or
- You become aware of a potential claim
Your professional liability policy may specify the amount of time you have to inform your provider. However, it may be best to do so as soon as the third party files the claim or you become aware of a potential claim.
If you fail to provide notice promptly, your provider may have valid grounds to deny you coverage later on.
Two Critical Lessons from Real-Life Prior Knowledge Claims
1. It May Be a Good Idea to Report (Potential) Claims Even If You Think They May Be Baseless
In this case, an attorney found himself on the receiving end of three legal malpractice actions relating to the formation of a corporation.
The attorney did not notify his insurance company. He viewed the cases as obviously lacking merit and did not reasonably expect to have to make an insurance claim.
Instead, he hired an attorney to defend the lawsuits and ultimately prevailed. It was at this point that he notified his insurance company of the proceedings and requested reimbursement of $90,000 in defense fees.
To his surprise, the company denied his claim on the grounds that:
- He had not reported the malpractice lawsuits during the policy in which they commenced
- He incurred expenses without the provider’s consent
In response, the attorney filed a lawsuit against the insurance company . He claimed that he had successfully defended all three actions and his legal fees were reasonable.
After 18 months of litigation, including an appeal , the court found that it was not relevant whether:
- The insurance provider was prejudiced
- The attorney had maintained continuous coverage for several years with the same provider
The court limited its analysis to the terms of the policy at hand, which required the attorney to report malpractice claims during the relevant policy period. Therefore, the denial of coverage was proper.
2. You Should Notify Insurance Providers of Potential Claims When Applying for a New Policy
In this case, a law firm applied for a new professional liability policy without reporting prior knowledge of actual or potential malpractice claims.
However, before completing the insurance application, the law firm had filed two medical malpractice suits on behalf of a client. Both resulted in dismissals: one for failure to caption a pleading correctly and the other for filing outside the statute of limitations.
A court later ruled that the insurance company did not have an obligation to cover the ensuing legal malpractice claims.
The court did not limit its analysis to the law firm’s subjective knowledge but instead considered what an objectively reasonable attorney might have foreseen. At the time of making the insurance application, the law firm was on notice that it had committed a breach of professional conduct or at least should have foreseen a potential malpractice claim.
This indicates that if you notify your provider of a potentially litigious situation that occurs during Policy A, you may typically preserve your coverage under Policy A even if the circumstance develops into a malpractice claim under Policy B. However, if you fail to notify your provider in a timely manner, they may have valid grounds to deny coverage.
Other Tips to Help Avoid Prior Knowledge Claims in Your Practice
In addition to reporting all actual and potential malpractice claims as soon as you become aware of them, the following steps may further minimize your exposure to prior knowledge claims when renewing or applying for malpractice insurance:
- Inaccurate disclosures or misrepresentations. Do not make inaccurate disclosures or misrepresentations on your insurance applications. Note that in some jurisdictions, even innocent misrepresentations may result in the rescission of the policy.
- Acts, errors, or omissions. Disclose any acts, errors, or omissions that may give rise to a claim against you.
- Past claims or legal action. Report any past claims or legal action against you, your firm, its predecessor(s), and any current or former principal, partner, director, officer, or employee in the past five years.
- Potential claims under the proposed policy. Report any knowledge of your firm’s principals, partners, directors, officers, employees, or insurance managers of any act, error, omission, fact, incident, situation, unresolved job dispute, accident, or any other circumstance that is or could be the basis for a claim under the proposed policy.
- Potential claims under your existing policy. Disclose knowledge of all such incidents to your current insurance provider before your extant policy expires. Your new policy may not cover incidents you were aware of prior to the effective date of the policy. The new policy may also not cover claims or circumstances that you identified or should have identified in the application.
- Fill out the application yourself. Some attorneys may hire insurance agents to complete policy applications on their behalf. However, this may not be advisable considering the potential risks and the depth of inquiries.
Bonus Tip: Know the Definition of a Prior Knowledge Claim Under Your Policy
Different insurance providers may have slightly different interpretations of what qualifies as a prior knowledge claim. With this in mind, peruse the terms of your policy carefully, especially if you are switching providers.
Contributions by Scott R. Schaffer of Wilson Elser Moskowitz Edelman & Dicker, LLP
This article is provided for general informational purposes only and is not intended to provide individualized advice.