Prior Acts Coverage: What it Means, How it Works

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

David Kindness is a Certified Public Accountant (CPA) and an expert in the fields of financial accounting, corporate and individual tax planning and preparation, and investing and retirement planning. David has helped thousands of clients improve their accounting and financial systems, create budgets, and minimize their taxes.

What Is Prior Acts Coverage?

Prior acts coverage is an insurance policy feature that covers claims made on insurable events that occurred prior to a policy’s purchase. This simplifies insurance matters for holders of liability insurance who change insurance providers.

Key Takeaways

• Prior acts coverage is an insurance policy feature that covers claims made on insurable events that occurred prior to a policy’s purchase.
• Prior acts coverage typically gets sold in the context of liability insurance, which protects entities from suffering legal repercussions for certain activities they undertake that inadvertently cause injury or damage to others.
• Insurance companies offering prior acts coverage usually provide a retroactive date at some point prior to the first date of the coverage period.
• The insurance company will then cover any claims filed for events that occurred after the retroactive date, even if those events took place when the business or entity involved had insurance from another provider.

Understanding Prior Acts Coverage

Prior acts coverage typically gets sold in the context of liability insurance, which protects entities from suffering legal repercussions for certain activities they undertake that inadvertently cause injury or damage to others. For example, malpractice insurance may cover legal costs and damages in the event a patient sued a medical practitioner for the provision of negligent care. Since these claims can take time to adjudicate, a business could easily end up filing a claim for an action it committed one year or more prior.

Insurance companies offering prior acts coverage usually provide a retroactive coverage date, or a date in the past which is at some point prior to the first date of the current coverage period. With prior acts coverage, the insurance company will then cover any claims filed for events that occurred after the retroactive date up until the point of active coverage (even if those events took place when the business or entity involved was covered by an insurance policy from another provider). The retroactive coverage date defines the limitations of prior acts coverage.

Prior Acts Coverage vs. Claims-Made Policy

Prior acts coverage can be contrasted to a claims-made policy. When you purchase a claims-made policy, the insurer provides coverage for any claims that occurred and were reported during the policy period. In the event that both a claim arises while the insurance policy is active and the event that sparked the claim also occurred during that time period, a claims-made policy will provide coverage for the insured. With a claims-made policy, it's very important to properly renew your policy so that there are no gaps in your coverage.

In order to make sure that you are covered for acts that took place before you purchased your coverage, you are going to need to purchase prior acts coverage. For example, in the event of a malpractice claim, if the claim doesn't arise in the same year that the activity that inadvertently caused injury or damage to others took place (which is common), a claims-made policy will not cover the claim.

Example of Prior Acts Coverage

Medical malpractice insurance rates vary widely from state to state and are based upon the type of practice a doctor has. Policies clearly identify their effective dates and the risks that the policy will cover. In other words, the policy will cover any claims made during the coverage period for any actions taken during the coverage period. Without extra coverage, however, a doctor who switches malpractice insurance carriers at the beginning of the year to take advantage of better premiums would have a problem if a claim arose in March for a procedure the doctor performed in the previous year in June.

If the doctor takes out a new malpractice policy that includes prior acts coverage with a retroactive date before June 1 of the previous year, the new coverage will pay the claim. Most claims-made policies automatically apply a retroactive date corresponding with the first date of coverage when insured parties continually renew their policies. Therefore, a doctor covered with such a policy would have no issue filing a claim on a four-year-old case under a policy that the practice continuously renewed for the previous five years.

Some insurers offer prior acts coverage without a retroactive date. These policies cover any claims made during the coverage period, regardless of when the activity giving rise to the claim took place. Insurers typically shy away from offering full prior acts coverage to individuals or businesses who operated without previous liability insurance coverage on the theory that such customers likely waited to purchase insurance until they perceive a heightened risk of one or more claims.