Prior acts exclusion-Significance in liability policies

 An important feature of liability policies such as D&O or E & O insurances is the prior acts exclusion. Prior acts exclusion in these policies mean that the policy will not cover any claim arising out of an event that occurred before the inception of the policy.

The prior acts exclusion feature takes on different implications in each of these insurance policies. It is important to know about the implications before purchasing any liability policy.

Let us know more about prior acts exclusion in insurance. This article will cover the meaning, application and implication of the prior acts exclusion in relevant insurance policies.

Prior acts exclusion definition in insurance policies

Prior acts are defined in insurance policies as the prior claims or circumstances that have resulted from alleged or wrongful acts contained in any claim that has been reported or any circumstances for which notice has been given under a policy which is being purchased. The prior acts exclusion applies to any pending or previous litigation related to the insurance policy.

A policy with  this exclusion will not cover these prior acts or litigations.

Prior acts exclusion in different insurance policies

As we mentioned earlier, the prior acts exclusion clause is applicable to various liability insurance policies. In D&O policies with the prior acts exclusion, the insurer will not give cover for any claims which the company’s management was aware of before the inception of the policy or which were required to be reported during past policy periods.

Here is an example-Mr. Raju recently joined as the CFO of a company. The company had raised investments from quite a few investors through a crowdfunding platform. As a result the company had received a notice from the Ministry of Corporate Affairs for this capital raise transaction.

The CFO, Mr. Raju was keen to buy a D&O insurance policy with the hope that the consequences of the notice from the Ministry of Corporate Affairs will be covered under the policy. But he discovered that due to the prior acts exclusion, this will not be possible. This is because the claims related to litigations prior to the starting date of the policy will not be covered.

 

Professionals or businesses opting for E&O policy to protect their businesses or services from lawsuits with claims arising out of errors in service or negligence must remember that this policy is also subject to prior acts exclusion.

 

Here is an example: a plastic surgeon performed a rhinoplasty in the month of May in 2023 but his patient seemed to be dissatisfied  with the procedure outcome. Fearing  a lawsuit from the patient, he decides to take an E & O insurance policy in the month of June of the same year  to pre-empt any litigation from the patient. However when he was going through the policy, he realized that the prior acts exclusion in the policy will not protect him against any litigation due to the consequences of his actions committed before the starting date of the policy.

When purchasing policies that have the provision of the prior acts exclusion, it is advisable to go through the exclusion and read the policy wording before purchasing the policy. This will help the buyer understand when the exclusion is effective and how far the policy will benefit him if he decides to purchase it.

It is best to approach an insurance broker to get a clear understanding of the prior acts exclusion and take the right decision.

We at Zen Insurance Brokers assist in choosing an insurance policy with clauses suited to your requirements. Choose your insurance policy wisely. Get in touch with us for any assistance.

Disclaimer:

Zen Insurance Brokers is an IRDA registered broker which facilitates quick and adequate insurance broking services. We deal with only regulator approved products of insurers. We do not underwrite the products.