Clients: Checker Transportation
Date: July 1, 2001
Status: Closed in Favor of Client

Appropriate Wording of the Prior Knowledge Exclusion

The prior knowledge exclusion is typically used when an EPL policy affords coverage for prior acts (i.e., acts that took place prior to policy inception but that were either unknown to the insured, or, if known, did not appear to have the potential to give rise to claims in the future). Prior knowledge exclusions bar coverage for claims made during an EPL policy period, if it can be shown that the circumstances surrounding the claim were known at the inception of the policy period and that it was reasonable to believe that such circumstances could be the source of a future claim.

Claim Scenario

Insured terminated an employee. After (but not during) the exit interview with the company’s human resources vice president, the employee, while leaving the company’s premises, says to a coworker, “… I’m going to see a lawyer. After 15 years at this place, I deserve better. Hopefully, I’ve got grounds for a lawsuit …” On December 18, 2001, the insured applies for EPL coverage. A policy is issued with an inception date of January 1, 2002. The policy contains a prior knowledge exclusion that states, in part, “… It is agreed that coverage does not apply to claims arising from circumstances or incidents of which the Insured was aware prior to the inception of this policy.” On July 1, 2002, the company receives a summons and complaint from the employee who was terminated a year earlier. However, since the employee had voiced a desire to sue the corporation, based upon the wording of the exclusion, coverage does not apply. Or does it?

Unfavorable Outcome

Coverage is not provided for …

Any “Claim” arising from or in any way related to incidents, situations, or circumstances of which any “Insured” had knowledge prior to the effective date of this policy, and which any “Insured” could reasonably foresee could result in a “Claim”.

Favorable Outcome

Coverage is not provided for …

Coverage does not apply under this Policy to any Claim … where, prior to the inception date of this Policy or the inception date of the first Policy issued by us of which this Policy is a continuous renewal … the persons responsible for receiving notice of employment practice Claims in the Insured’s Law Department, Human Resources Department or Risk Management Department had actual knowledge of such Claims or circumstances giving rise thereto.

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