New York Federal Court Holds Prior Knowledge Exclusion Applies Only to Known Claims, Not Facts and Circumstances That Could Lead to a Claim

Applying New York state law, the United States District Court for the Northern District of New York held that a professional liability insurer had waived its rescission claims by failing to request additional explanations for certain application responses, and that the policies’ prior knowledge exclusion did not bar coverage for the underlying malpractice litigation because it applied only to “known or reasonably knowable Claims” and not “known or reasonably knowable facts and circumstances” that might give rise to a claim. Integris Risk Retention Grp. v. Cap. Region Orthopedics Assocs., PC, 2024 WL 4347791 (N.D.N.Y. Sept. 30, 2024).

In March 2022, one of the insured healthcare provider’s patients was paralyzed and ultimately died after undergoing back surgery. At the end of September 2022, the insureds submitted insurance applications to the insurer, answering “yes” to certain questions about prior malpractice claims or suits but failing to provide a “separate explanation” as required by the application or to disclose the facts surrounding the March 2022 medical incident. Upon receipt of the applications, the insurer issued two policies to the insureds, both for the period of October 1, 2022 to October 1, 2023. Thereafter, in March 2023, the family of the deceased patient filed several malpractice suits against the insureds. The insurer initiated coverage litigation to rescind the policies based on the insureds’ asserted misrepresentations and nondisclosures in the applications and, alternatively, to obtain a declaration that coverage was precluded by the policies’ prior knowledge exclusions, which barred coverage for damages “arising out of a Claim made or brought against the Insured that the Insured knew or reasonably should have known about prior to the effective date of” the policies.

The court, in granting the insureds’ motion to dismiss, held that the insurer had waived its rescission claims by failing to request further explanation from the insured about its affirmative answers in the applications. The court also held that the prior knowledge exclusions did not preclude coverage because there was no “Claim” made before the inception of the policies. In so holding, the court rejected the insurer’s argument that the exclusion applied because the insureds were aware of the March 2022 medical incident before the inception of the policies.  Instead, the court emphasized what it viewed as the narrow scope of the prior knowledge exclusion, contrasting it with what the court deemed were broader prior knowledge provisions commonly found in other insurance policies. It noted that many such provisions would apply to, and thus bar coverage for, reasonably known “facts and circumstances” that could potentially lead to a claim, but the plain language of the exclusion at issue explicitly referenced “Claims” rather than “facts and circumstances.” As such, the court determined that the insurer had failed to establish why the exclusion applied given its unambiguous terms.