Claims-Made E&O, Prior Knowledge, and a Renewal Application
Halcyon Structural Engineering carries a claims-made professional liability policy with a $2 million limit, a $50,000 self-insured retention, a retroactive date of 1 January 2021, and a prior-knowledge exclusion. The 2023-24 policy incepted 1 July 2023. In November 2023 a contractor emailed Halcyon's principal that a 2021 parking-deck design was spalling and that the owner had consulted a lawyer; Halcyon did not report it. In March 2024 the owner sued for $3.4 million, and Halcyon reported the suit on 2 April 2024, still inside the policy period. The policy requires claims be reported as soon as practicable. Separately, Halcyon's June 2023 renewal application answered no to any known circumstance that might give rise to a claim, although a May 2022 condition survey the firm prepared had flagged incipient spalling consistent with inadequate cover on the same bays. The insurer is weighing a reservation of rights, a declaratory judgment action, and rescission.
1. Is the claim covered under the 2023-24 policy? Work through the trigger, the retroactive date, the prior-knowledge exclusion, and late notice.
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The trigger is met: a claim was first made and reported during the 2023-24 policy period, and the 2021 design postdates the 1 January 2021 retroactive date. The self-insured retention applies first. Late notice is a weak defense, because seven days from service of suit is not a failure to report as soon as practicable, and most jurisdictions require the insurer to show prejudice anyway.
The real exposure is prior knowledge, which turns on what the firm knew before 1 July 2023 and whether a reasonable professional would have expected a claim. The May 2022 survey flags spalling consistent with inadequate cover on the same bays, which is more than a generic worry, but it is a condition report rather than a demand, and such exclusions are construed narrowly. The November 2023 email came after inception, so it cannot support the prior-knowledge exclusion for this policy year. Gather the full survey, client correspondence, and the principal's file notes before taking a position; this is a close, fact-driven call.
2. Assess the rescission exposure created by the renewal application and compare it with relying on the prior-knowledge exclusion.
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Rescission requires more than an inaccurate answer. The insurer must show the statement was material, that it relied on it, and in many states that it was made with intent to deceive. The answer of no known circumstances is troubling because the 2022 survey sits in the firm's own file, but the firm can argue that a maintenance finding is not the same as a known claim circumstance. Several states will not rescind for a merely negligent misstatement, and some require proof that the insurer would have declined or rated the risk.
Rescission is also the riskier path commercially: it invites a bad-faith claim, requires prompt action, and requires return of unearned premium. The prior-knowledge exclusion is a contract defense that keeps the policy in force and limits the dispute to the specific claim. Reserve rights on both theories, complete the coverage opinion, and let a declaratory judgment resolve them. Do not threaten rescission in correspondence before the investigation is complete.
3. What should the insured be told about its other policies, and what procedural steps protect the carrier?
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Tell the insured to notify the 2022-23 carrier immediately. If the 2022 survey is treated as a circumstance that could give rise to a claim, the claim may be first made in that earlier policy year, and that policy's own reporting condition and prior-knowledge exclusion decide whether it responds. Late notice to that carrier could forfeit coverage entirely, so the letter should go out at once.
For the carrier: issue a reservation-of-rights letter naming the specific exclusions and the notice issue; appoint and control defense counsel, funded within the retention; file or fund a declaratory judgment action rather than sending a bare denial, which risks an estoppel argument; and document the first notice date and every communication. Do not let the coverage dispute stall the defense. The insured keeps its defense while coverage is unresolved, and any statement that reads as a final denial before the coverage opinion is complete will be used against the carrier.