Malpractice Insurance Basics: Part 2

Prior Acts Coverage

With the short history lesson of Part 1 behind us, we can now start to dig into the basics of malpractice insurance.  In order to do so, we need to first understand what coverage for prior acts actually is.  Let me start by defining the term “retroactive coverage date.”

The retroactive coverage date is usually the same date from which continuous coverage was first obtained by the current or predecessor firm.

This is why it is so important to obtain malpractice coverage when first starting out in the practice of law. You can’t wait two years to buy your first policy and expect the insurer to backdate the policy in order provide coverage for those first two years. Coverage will begin on the effective date of the first policy and run forward from there.

Now, understand that in order to maintain continuous coverage throughout your career for all the work you have done during your career, a new policy that includes prior acts must be purchased each year. Again, remember how claims-made and reported coverage works.  In the absence of coverage for prior acts, under a traditional claims-made and reported policy you would only have coverage for a claim if the malpractice misstep that occurred happen to occur during the current policy year and then the claim would also need to arise and be reported during this same policy year.  Yes, while having coverage for some claims is better than having no coverage at all, given that many malpractice missteps are not discovered until well after the year in which they were made, coverage for prior acts is a true necessity.

Let’s look at an example in order make this as clear as possible.

Kathy graduates from law school, passes the bar, and decides to hang out a shingle.  Office space is obtained, all the supporting tech is in place and the first several months of practice are primarily spent on networking and getting her name out there. While it’s been slow, a little work has come through the door and finally Kathy says to herself it’s time to buy a malpractice policy and she does so.

Let’s look at this on a timeline.

The date Kathy hung out her shingle happened to be January 15, 2017 and she submitted an application for a malpractice policy on August 2^nd.  Shortly thereafter she was approved and the first day of coverage, the policy inception date, was set at August 2, 2017.  The policy term is one year.  Because this is her first policy, the policy inception date will also be her retroactive coverage date.  Since the retroactive coverage date is August 2, 2017, no coverage is going to be available for any of the work done prior to that date even if a claim based upon that work were to arise and be reported during this first policy period. Again, and this bears repeating, her claims-made and reported policy would only provide coverage for a malpractice misstep if that misstep were to occur during this initial policy year, which started August 2nd, and on the condition that the related claim would both arise and be reported during this same initial policy year.  That’s it.

Now let’s look at year two.

Kathy reapplies for continuous coverage and is approved. A new policy is issued with a policy inception date of August 2, 2018; but she has coverage for prior acts so her retroactive coverage date will remain August 2, 2017. The claims-made and reported coverage remains the same as it was in year one. She would be covered for a malpractice misstep if that misstep were to occur during this second policy year, and again, on condition that the eventual claim both arises and is reported during this same current policy year.

What is different in this second year is that her coverage for her prior acts extends her coverage back one year. This means that Kathy is covered if a malpractice misstep were to occur on or after August 2, 2017 (her retroactive coverage date) on the condition that the claim would both arise and be reported during this current policy year, meaning year two. If Kathy commits to maintaining continuous coverage with prior acts in place, her retroactive coverage date will remain the same and her coverage for prior acts will continue to broaden one year at a time.