US COVERAGE DISPUTE: SIXTH CIRCUIT FINDS PRIOR KNOWLEDGE FATAL TO CLAIMS-MADE INSURANCE POLICY

Brief background

The insured applied for a claims-made professional liability policy and answered “No” to a question asking whether it was aware of any circumstances that might result in a claim. Prior to the application, the insured had received multiple complaints from a customer regarding defective equipment and had internally acknowledged the issues. The insurer denied coverage when a lawsuit was later filed, citing the prior-knowledge exclusion in the policy.

Issue for determination

The court was called upon to decide whether an insured was entitled to coverage under a professional liability insurance policy despite having prior knowledge of circumstances that could reasonably give rise to a claim.

Discussion

The policy contained a prior-knowledge exclusion, which barred coverage for any claim arising from circumstances known to the insured before the policy’s inception that could reasonably be expected to result in a claim. The Sixth Circuit affirmed the district court’s grant of summary judgment in favour of the insurer, holding that the insured’s prior knowledge of the dispute precluded coverage.

Court’s reasoning

The court applied Michigan law, which enforces the plain language of insurance contracts. It found that the insured had actual knowledge of the potential claim before the policy was issued. The exclusion was clear and unambiguous, and the insurer was entitled to rely on the insured’s representations in the application. The insured’s attempt to characterise the issue as a minor dispute or the fault of a third party was rejected.

Conclusion

Disclosure obligations during the insurance application process are critical; failure to disclose known risks can void coverage. Courts will enforce prior-knowledge exclusions strictly, especially in claims-made policies. Insureds must carefully assess whether any known circumstances could reasonably lead to a claim and disclose them accordingly.

Mtho Maphumulo

Senior Associate | Litigation Attorney

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