What is the Innocent Insured Clause?
In most of my writings, you will see me emphasize the importance of accurate, timely and careful reporting of potential claims. Most professional liability insurance policies contractually obligate or place a duty upon the insured to report incidents or potential claims somewhere along the process. Whether it be completing a new business application or during the renewal process, the insured is obligated to reveal any potential circumstances, which could result in a claim.
The innocent insured clause, which is different in every malpractice insurance policy (consult your policy directly) can protect one unknowing party from another’s concealment of a potential claim on an application. This clause can often be found in the intentional acts exclusion in the LPL policy. For example, a two partner firm submits a malpractice application, but one of the partners fails to disclose to his other partner and to their insurer the existence of a legal malpractice claim. Both partners check the no option when prompted on the application about whether they are aware of any claims. When a claim arises the insurer seeks rescind the policy based on the concealment of the potential claim on the application. However, the innocent partner who is unaware of the claim at the time cites the innocent insured clause in the policy. Some jurisdictions protect the innocent partner and force the insurer to provide coverage based on this clause.
Another common scenario where this clause can come up is when a firm merges with another firm. You may not know everything there is to know about all of the other firm’s members who will be joining your firm, making the vetting process more difficult. Also, the prior knowledge exclusion in the malpractice policy may deprive the innocent insured of coverage and a defense all together. Every court is going to apply different principles and standards where the law is concerned in that jurisdiction. Based on my research, the case law and court decisions are split on the innocent insured clause depending on the state and jurisdiction.
These examples demonstrate why reading and understanding your malpractice policy is so important. No two policies are created the same. You should consult with all attorneys within the firm prior to completing the application. In larger firms, sometimes having the lawyers fill out a census is a good option to have all pertinent information in writing from the attorneys. I can’t stress enough the importance of having a specialty insurance broker or professional liability consultant, who can educate and answer questions on lawyers’ professional liability insurance.
I’m the founder of Attorney Insure L.L.C., an independent niche insurance brokerage. We are a leading provider of legal malpractice, cyber liability and commercial insurance for the legal community. I often blog, speak and educate on lawyers’ professional liability insurance. I have a background in insurance law and professional liability claims. I’m happy to answer questions; please contact us with any questions you may have.
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