Prior Bad Acts
What are Prior Bad Acts?
"Prior bad acts," within the realm of Directors and Officers (D&O) insurance, pertains to wrongful actions or omissions that occurred before the inception of a D&O insurance policy. The definition of "prior bad acts" is closely tied to the conduct of directors and officers of a company which might give rise to potential claims under the D&O insurance policy.
Prior Bad Acts in More Detail
The primary meaning behind “prior bad acts” is to distinguish between wrongful actions or omissions that occurred before the start date of the policy and those that take place during the policy period. This distinction is crucial as D&O policies typically operate on a “claims-made” basis. This means that the policy responds to claims made against the directors and officers during the policy period, irrespective of when the wrongful act occurred. However, insurers will often exclude “prior bad acts” that were known or should have been known by the insureds before the policy inception, to prevent adverse selection where companies seek coverage for known liabilities.
In practical terms, “prior bad acts” may refer to any decision, error, misstatement, neglect, or breach of duty committed by a director or officer before the policy’s effective date. The inclusion or exclusion of coverage for these acts is contingent on the terms negotiated between the insurer and the insured. Often, when transferring from one insurer to another, companies will seek “full prior acts” coverage, meaning there is no date restriction on acts that might give rise to claims, as long as those acts were unknown at the time the policy was initiated.
Understanding the nuances of “prior bad acts” and how they are treated in a D&O insurance policy is essential. It ensures that directors and officers have clarity on the breadth of their coverage and aids in avoiding unexpected coverage gaps related to actions that transpired before the policy began.
Subscribe to The Shield
A bite-sized newsletter outlining industry insights & best practices for high-growth companies.