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Prior Knowledge And Coverage Investigations

It is advisable that immediate notice be provided to one’s insurer in the event of a claim or potential claim. Doing so will divest the Insured of his or her notice responsibility. It is noteworthy that the insurer will usually employ its own lawyer (“coverage counsel”) to handle the claim and among other things, investigate whether the Insured possibly had undisclosed “prior knowledge” of the claim for which the policyholder now seeks coverage. The insurer or its appointed representative will likely have a preliminary conversation with the insured reporting the claim, ask to review the documents/pleadings involved in the claim, and review the Insured’s Application to confirm whether the claim was previously disclosed, etc. It is a condition of the policy to comply with these requests. The process need not be difficult or arduous and is described further below.

  1. The Coverage Investigation

    The inquiry is generally conducted by coverage counsel retained by the insurer. The insurer generally advises the Insured of the pending coverage investigation and may assign defense counsel to the Insured, pending the outcome of the coverage investigation. If the investigation determines that the insured had knowledge prior to the inception of the policy of the claim for which coverage is sought, the insurer may deny coverage and would have viable coverage defenses.

    There are multiple reasons why an insured may not have previously disclosed his or her prior knowledge of the claim at issue in the insurance Application. Some of these reasons include, but are certainly not limited to:

    1. Fear that the Application may be denied;
    2. Fear of increased premiums;
    3. Embarrassment (personal or to the Firm);
    4. Personal Opinion (a belief that the claim is baseless); or
    5. State of denial.

    Coverage counsel may explore any of the foregoing possibilities in an attempt to determine whether or not the insured had prior knowledge of the claim. The investigation may include a review of the insured’s file, interviews and research into the insured’s background and prior insurance policies.

  2. The “Reasonableness” Test

    Once the coverage investigation is complete, the insurer employs a test for determining whether a policy’s notice provision has been triggered, i.e., “whether the circumstances known to the Insured at that time would have suggested to a reasonable person the possibility” that a claim would be made. See Security Mut. Ins. Co. v. Acker-Fitzsimmons, Co., 31 N.Y.2d 436, 340 N.Y.S.2d 902 (1972).1 The Insured bears the burden of proving the reasonableness of his excuse, which must be reasonable under all the circumstances. See Security Mut. at 443; Sirignano v. Chicago Ins. Co, supra.

  3. The Outcome

    Should the insurer determine that the insured had prior undisclosed knowledge of the claim, coverage for that particular claim is generally denied. However, the policy generally remains in effect for its term.2 The insurer may commence a declaratory judgment action, requesting that the court declare that the policy is not triggered in light of the Insured’s prior knowledge of the claim, and on grounds of misrepresentation. If the insurer is successful, the Insured bears uninsured exposure, which, depending on the nature of the plaintiff’s damages, could be devastating to the insured. It is therefore extremely important that the insured seeking coverage disclose any prior knowledge of claims or potential claims on the insurance Application to avoid the potential loss of coverage.

1As set forth above, the Courts now appear to be adopting a mixed “subjective/objective” standard.

2This outcome may be contrasted with a scenario in which the insurer determines that the insured affirmatively misrepresented certain facts on the insurance Application. In that scenario, the insurer may rescind (cancel) the insurance policy that was issued in reliance upon material representations. See Chicago Insurance Co. v. Kreitzer & Vogelman, No. 97 Civ. 8619 (RWS), 2000 WL 16949, at *15 (S.D.N.Y. Jan. 5, 2000).