Prior Acts Coverage - What It Means

Written by Instant E&O

Error and omissions insurance policies are usually written on a Claim Made basis. This means that for a claim to be covered, the services that gave rise to the lawsuit must have taken place while the policy is in force. Additionally, the services must have been performed after the policy retroactive limitation date. This retroactive limitation date is usually the commencement date of the first errors and omissions policy you purchased and appears on the declarations page of your policy.

With each renewal of your policy, the retroactive limitation date advances one year. This means that if you bought your first policy in 2011 and renew the policy each year for three years, the current policy provides coverage for services performed during the 2011 thru 2014 period. This coverage for past services is generally refer to as prior acts.

Because the risk of lawsuits increases with each year, the cost of the coverage for prior acts increases. In the case of, the base rate for coverage increases by a fixed percentage each year for the first three years of coverage. After three years the base rate does not increase.

The basic formula for this is:

Step: Step 1 Step 2 Step 3 Step 4
Percentage increase in premium: 100 % 112 % 120 % 12 6%
Example of base costs: $375 $392 $420 $441

This is a fixed calculation and if you chose not to renew coverage you may lose coverage for claim arising from past services and may not be able to reinstate this. Most insurers will not automatically grant coverage for services performed before the policy term and will seek evidence of continuous insurer before doing so.

If you have no expectation that a claim will arise from past services can provide prior acts coverage for certain qualifying risks, subject to the additional premium parameters outlined above. You may wish to consider this if you commenced your business before the purchase of your policy. However, if you knew about a claim or situation that might give rise to a claim before buying a policy, it is highly likely the insurer will deny coverage.