Prior and Pending Litigation in Professional Indemnity Policy

 

The prior and pending litigation exclusion in liability policies is a clause designed to exclude coverage for claims related to legal disputes or circumstances already known, pending, or in progress before the policy's effective date. It’s an important exclusion because it limits the insurer’s liability for events that occurred before the policy began.

Here are more details about this exclusion.

Purpose of the Prior and Pending Litigation Exclusion

• Insurers include this exclusion to avoid covering claims or disputes that were known or existed before the policy started.
• It ensures that the underlying policy , Directors & Officers (DnO), Professional Indemnity (PI) policy, etc., only covers new claims that arise from professional errors, omissions, or negligence occurring during the policy period and not pre-existing or ongoing legal matters.

What the Exclusion Covers

• Prior Litigation: Any lawsuit, claim, investigation, or legal proceeding initiated before the policy’s inception.
• Pending Litigation: Any legal action, investigation, or regulatory proceedings that is ongoing at the time the policy takes effect, even if it hasn’t been formally filed in court.

 How the Exclusion Works

• Exclusion of Pre-existing Claims: If a claim or lawsuit existed before the policy’s start date or if a legal proceeding was pending at the time the policy began, the liability insurer will not provide coverage for that claim.
• Known Circumstances: The exclusion also typically applies to circumstances or incidents that the insured knew about before the policy started, even if they hadn't yet led to formal litigation.
• Covered Scenarios: A company faces a new negligence claim during the policy period, which is unrelated to any prior or pending litigation. The claim is covered,

 

Practical Examples

• A company provides professional services and is sued for negligence. The lawsuit is filed before the company purchases a PI policy. Under the prior and pending litigation exclusion, the insurer will not cover the claim because the legal action started before the policy was in effect.
• If the company knew that a client was dissatisfied and likely to sue (even if a lawsuit hadn’t been filed), this potential claim could also be excluded from coverage if the company did not disclose this information.
• There is a claim made by one of the employees against one particular Director for the first time during the policy period. This also get covered

Significance of the Retroactive Date

• Independent of the prior and pending litigation exclusion, most liability policies include a retroactive date. The retroactive date is the point before which professional services performed or Directors actions taken by the insured are not covered, even if claims related to those services arise after the policy period.
• For example, if a retroactive date is set for January 1, 2022, any professional work done before that date, even if the claim is made after the policy starts, will not be covered.

Disclosure Requirements

• When applying for liability coverage, insured professionals or companies are generally required to disclose any known or pending claims or circumstances that might give rise to a claim. Failure to disclose this information could lead to the denial of coverage under the exclusion clause.

Scope and Limitations of the Exclusion

• The exclusion is broad and may apply not only to formal lawsuits but also to regulatory investigations or internal inquiries that could lead to a lawsuit.
• Any situation that is substantially related to a prior claim or known event may also be excluded, even if the claim arises after the policy starts.

 Key Considerations for Policyholders

• Full Disclosure: When purchasing any liability policy, it’s crucial to fully disclose any pending legal issues or potential claims, as failure to do so can render the policy ineffective in case of a dispute.
• Understand Policy Periods: Pay close attention to the inception date, and retroactive date, and how these work in conjunction with the prior and pending litigation exclusion.
• Assess Legal History: Companies or professionals with a history of litigation may need to consider whether the new liability policy adequately covers their risks or seek special endorsements.

The prior and pending litigation exclusion is a critical component of all Liability  policies, ensuring that coverage only applies to new, unforeseen risks, and not pre-existing legal problems.

Insured professionals or companies need to understand the scope of prior and pending litigation clauses. Failure to recognize these limits can leave an entity vulnerable to significant financial exposure if claims arise from past events. It is best to approach an insurance broker to get a clear understanding 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 IRDAI 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.