The “prior knowledge exclusion” is an important provision to understand in the world of claims-made insurance policies. A typical prior knowledge exclusion specifies that the policy may provide coverage for a claim only if, prior to purchasing an insurance policy, the insured did not know or reasonably could not have known about a problem that might reasonably be expected to be the basis of a claim. It’s important to pay attention to the exclusion, otherwise you may end up with no coverage for a claim. That’s exactly how the prior knowledge exclusion made headlines in Hollywood.
Harco National Insurance Co. sued actor-director Justin Baldoni and other executives at his movie studio Wayfarer (collectively “Wayfarer”) asking the court to declare that its policies do not provide coverage for the claims actress Blake Lively asserted in her lawsuit against Wayfarer. She alleged that sexual harassment occurred during the filming of the movie It Ends With Us. Harco is arguing that, based on the prior knowledge exclusion, it has no obligation to provide coverage. An additional reason is that Wayfarer provided late notice about Lively’s lawsuit.
The Basics
What is a Claims-Made Policy?
Some insurance policies are called “claims-made” policies. These policies are common for professionals like lawyers, accountants, architects, consultants, and insurance brokers and agents (Errors & Omissions or E&O policies), management liability insurance policies, directors and officers (D&O) policies, employment practices liability insurance (EPLI) policies, and cyber liability insurance policies.
A claims-made policy only covers claims that are made while the policy is active. It doesn’t matter when the incident or mistake happened; what matters is when someone makes a claim (this could mean filing a lawsuit or sending a legal demand letter, depending on the policy language).
The Prior Knowledge Exclusion
Insurance is supposed to be for things you don’t know about when you purchase a policy. The prior knowledge exclusion is meant to prevent people from buying insurance to have coverage for a problem they knew about before they bought the policy. So, based on the exclusion, even though a claim may be made after the policy is in effect, if the insured knew about the problem before they purchased the claims-made policy, then the insurer may not be obligated to cover that claim. In other words, the exclusion is designed to prevent people from waiting to buy insurance until after they know about a problem, and then expecting the policy to cover a claim that may be made based on that problem.
The exclusion may apply even if you had a hunch that something was wrong, but you didn’t believe that the issue would turn into a claim or lawsuit. It also may apply when a reasonable person in your position might expect a claim or lawsuit to be made.
How the Prior Knowledge Exclusion is Playing Out in Hollywood
In December 2024, Blake Lively filed a lawsuit claiming that she experienced sexual harassment, a hostile work environment, and retaliation by Wayfarer executives, including Justin Baldoni. In her complaint she alleges some of the harassment occurred in the spring of 2023 and she raised complaints about it at that time. She also alleges that Baldoni and another Wayfarer executive acknowledged that they were aware of serious human resources problems on the set. In Baldoni’s now-dismissed lawsuit against Lively, he admitted that Lively raised her complaints as early as May 2023.
Later, in November 2023, Lively’s lawyer sent Wayfarer a letter “reserving all legal rights” and stating that Lively would not return to the film’s production unless Wayfarer, Baldoni, and the other executives agreed to workplace changes. If they would not, then Lively was prepared to “pursue her full legal rights and remedies.”
Wayfarer applied to Harco for a management liability policy for coverage in mid-July 2023 and applied to renew that policy for the following policy year (2024 to 2025). Both applications stated that Wayfarer and its executives were not aware of any possible claims. Harco alleges that it issued the two policies to Wayfarer based on the representations in those applications. In its lawsuit, Harco is arguing that there is no coverage for Lively’s claim under either policy based on the prior knowledge exclusions in the policies.
The stakes are high for Wayfarer and its executives. If Harco is successful, it means that they will not have insurance to pay for their defense costs or the damages that Lively may be awarded if she prevails. These could total millions of dollars.
Why this Matters to You
Insurance can be complicated, but a little knowledge can go a long way.
If you purchase a claims-made policy, it’s important to be aware of the prior knowledge exclusion so that you will not be caught off guard and be in a situation where you may not have coverage for a claim. Here are some ways to protect yourself.
- When you apply for coverage, disclose issues and potential issues that you reasonably believe may result in a claim. Silence does not mean safety. Even internal complaints, particularly if they are serious and documented, might count as knowledge under the exclusion (Lively first raised her complaints internally to human resources).
- Do not ignore your continuing obligations to disclose issues during renewals. Even if there were no known issues when you first applied for the policy, if an issue may have occurred during the policy period and your renewal application states that nothing has changed, your insurer may argue that you breached your obligation to disclose and may seek to bar coverage based on the prior knowledge exclusion.
- Document everything. You should keep records of when you became aware of potential problems. If you are a business, you also should document who knew what and when. This can help resolve disputes about whether the prior knowledge exclusion applies.
- Read your policy carefully. Prior knowledge exclusions vary. Some use broad language like “any circumstances that might lead to a claim,” while others require actual knowledge of a specific claim.
- Remember that all is not lost if you disclose an issue or potential issue that you reasonably believe may result in a claim. The insurer may still issue a policy to you or offer coverage that excludes the issue that you disclosed.
Conclusion
The dispute between Harco and Wayfarer is a stark reminder that you need to read and understand your insurance policy and its limitations. The prior knowledge exclusion isn’t just fine print. Insurers expect honesty in exchange for issuing policies.
The lesson is clear: transparency is your best policy. If you know about problems, your instinct may be to stay quiet and hope your insurance will cover whatever claims that may be made against you. That approach can fail spectacularly, leaving you to pay for your defense costs and any damages that may be awarded against you.
The stakes are the same whether you’re a major Hollywood studio, a small business owner, or a professional. You should take the time to understand your claims-made policy. In the world of claims-made insurance, what you don’t disclose may hurt you far more than what you do.
Alexis Theriault is an attorney with the Boston-based law firm Conn Kavanaugh Rosenthal Peisch & Ford, LLP.
She can be reached at atheriault@connkavanaugh.com
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