When an individual or business decides to switch insurers, there’s always a gap between the old and new policies. Unfortunately, situations might occur in that limbo that the previous company won’t cover. This is when prior acts coverage is effective.
Prior acts coverage handles insurable claims that occur before the purchase of a policy by an individual or company. Under the framework of liability insurance, these situations are typically in the form of property damage or bodily injury.
At the time of purchase, the new insurance company determines a retroactive date for prior acts coverage. Any insurable issue that occurred from that point on would be placed under a coverage umbrella. This doesn’t mean every claim would be accepted. They still need to go through an adjuster and underwriting phase to determine if they’re valid.
For instance, let’s say someone who provides professional advice gets sued by a client in the period between they ended one policy and started another. If the claim of negligence fell within the timeframe of prior acts coverage, then legal fees and judgments would be handled by the insurer. However, should it fall outside of the limits, the professional would be the sole party responsible for making the payments.
Some policies require the insured to pay for prior acts coverage instead of it being built within the policy. Claim-based insurance is one example. Here, the insurer only covers claims that occurred within the timeframe of policy ownership. It wouldn’t cover any claims that occurred before purchase. Thus, the policyholder would need to purchase a rider to handle coverage for prior acts.
Some companies offer prior acts coverage in their policies without a retroactive date. To put this another way, any tort-based (civil) issues that arose before purchase would be considered by the insurance company.
However, many insurers frown on this type of coverage. If an individual or company files multiple claims prior to purchase, it’s assumed they’re a higher risk.