Irrelevant Innocence: The Interplay Between Innocent Insured Provisions and Prior Knowledge Provisions in Claims-Made Policies

Irrelevant Innocence: The Interplay Between Innocent Insured Provisions and Prior Knowledge Provisions in Claims-Made Policies

   By Charles Lemley and Kimberly Ashmore, Attorneys, Wiley Rein LLP

In their article, “Irrelevant Innocence: The Interplay Between Innocent Insured Provisions and Prior Knowledge Provisions in Claims-Made Policies,” Charles Lemley and Kimberly Ashmore of Wiley Rein LLP address perceived conflicts between two provisions in claims-made policies. Prior knowledge provisions prohibit coverage for claims stemming from wrongful acts the policyholder was aware of before the policy went into effect. Innocent insured provisions preserve coverage for those who had no knowledge of the dishonest or wrongful acts of other policyholders on the policy. The article first examines the interpretation and application of prior knowledge provisions. It finds that frequently such provisions are written so that the knowledge of one policyholder triggers the provision as to all policyholders on the policy. However, the prior knowledge provision may contain a severability clause or the policy may have a stand-alone severability provision through which policyholders who had no knowledge of a potential claim when the policy incepted would not come under the prior knowledge provision. The article proceeds to discuss the interplay among intentional acts, prior knowledge, and innocent insured provisions. The courts have consistently found that a policyholder who engaged in intentional wrongdoing has knowledge of facts that would put a reasonable person on notice of a potential claim. The article states that the innocent insured provision operates to save coverage only where coverage is excluded because the wrongful act that is the basis of the claim could be characterized as “criminal dishonest, illegal, fraudulent, or malicious.” The innocent insured provision does not apply where there is no coverage based on the policy’s prior knowledge provision. The article concludes, “To the extent that an insured is concerned about how a policy’s prior knowledge provision potentially may be applied, an insured can negotiate for the inclusion of severability language in the prior knowledge provision itself, or for a separate stand-alone severability provision.”

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