“Prior Knowledge” Exclusions

Liability insurance protects the insured against claims even when the acts that gave rise to them took place before the policy went into effect. Usually. If the insured was aware of facts or circumstances that reasonably led to the assumption that a claim would be asserted, coverage might be challenged.
Insurers address this situation by including “prior knowledge” exclusions. Case law in Truck Ins. Exch. v. Ashland Oil (7th Circuit, 1992) states: “Like the exclusion of a known preexisting condition from a health insurance policy, the exclusion from a claims-only policy of claims based on conduct that occurred before the policy was issued and that was known to have claim potential is uncontroversially proper.” Nevertheless, insured parties have benefitted from the courts’ reluctance to enforce broadly drafted prior knowledge exclusions if enforcement seems to interfere with the fundamental nature of the coverage. Peter Selvin and Elliot Chen, writing on the Ervin, Cohen and Jessup Blog, discuss a case in which a law firm was sued by a former client for malpractice, but the lower court, and then an appeals court, declined to enforce the prior knowledge exclusion.