Businesses decide to switch liability insurers or obtain higher policy limits for various reasons. In doing so, policyholders should exercise caution to avoid future claim denials (or even policy recission) based on so-called “prior knowledge” issues. Prior knowledge comes into play when the policyholder knew about facts, incidents, or circumstances that occurred before the policy incepted, which can lead to problems if the insurer asserts that the policyholder had “prior knowledge” of an incident before seeking new coverage, limits, or policies.

A recent case from the federal district court in New Jersey emphasizes the importance in carefully assessing and, if needed, disclosing claims or potential claims when applying for a claims-made liability policy to minimize the risk of a “prior knowledge” claim denial or policy rescission.

The Warranty Statement, Prior Knowledge Exclusion, and Claim Denial

Ascot Specialty Ins. Co. v. Mason, Griffin & Pierson, P.C., et al. (D.N.J. Aug. 18, 2025), involved a probate lawsuit alleging that a wife misappropriated real estate and other assets with the assistance of her lawyer. The next year, that lawyer’s firm placed a new professional liability policy with Ascot after signing an application and warranty statement with the following notice:

NOTICE: It is agreed by all concerned that if any of the proposed Insured Persons is responsible for or has knowledge of any Wrongful Act, fact, circumstance, or situation which s(he) has reason to suppose might result in a future Claim, whether or not described above, any Claim subsequently emanating therefrom shall be excluded from coverage under the proposed insurance. . ..

The firm declared in the warranty statement that it had no claims or lawsuits against it.

The issued policy provided coverage for wrongful acts that occurred during the policy period but also included a prior knowledge exclusion, extending coverage to wrongful acts that occurred prior to the inception of the policy period only if:

no Insured has any basis (1) to believe that any Insured breached a professional duty; or (2) to foresee that any such Wrongful Act or Related Circumstances might reasonably be expected to be the basis of a Claim against any Insured . . ..

During the policy period, the same claimant from the probate lawsuit filed a new action, bringing a malpractice action directly against the law firm. In that complaint, the claimant alleged that the firm committed legal malpractice by knowingly, intentionally, or negligently assisting the wife in tortious misappropriation of assets in connection with preparation of the estate plan. The firm notified Ascot of the claim, but Ascot denied coverage due under the prior knowledge exclusion.

The New Jersey Court Upholds the Insurer’s Prior Knowledge Disclaimer

After denying the claim, Ascot initiated a coverage suit in federal court in New Jersey seeking a declaration that it had no obligation to defend or indemnify the firm based on the prior knowledge exclusion and the firm’s alleged breach of the warranty statement in the application.

Ascot and the law firm disputed whether at the time the probate lawsuit was filed, the firm should have reasonably foreseen that a malpractice claim would be filed against the firm or should have reasonably foreseen that an insured breached its professional duty, which were the two triggers at issue in the prior knowledge exclusion.

Ascot argued that any reasonable attorney would have foreseen that the conduct alleged in the probate lawsuit would result in a claim against the law firm. In opposing Ascot’s motion for judgment on the pleadings, the firm countered that any question of what an attorney would have expected in light of the earlier probate lawsuit should be presented to the jury. The firm countered by emphasizing that the probate lawsuit did not include any direct legal malpractice claims and the probate complaint was amended to remove the claims against the firm’s attorney so that a reasonable attorney would not expect a malpractice claim would arise.

The court explained that the purpose of prior knowledge exclusions is to protect insurers against a professional who, recognizing a past error or omission, “rushes to purchase a claims-made policy before the error is discovered and a claim asserted against him.”

The court went on to discuss that courts typically used a mixed “subjective-objective” test to interpret prior knowledge exclusions. This test involves considering first if the insured had knowledge of the relevant suit; and then considering whether the suit might reasonably be expected to result in a claim. The parties asked the court to apply a subjective-objective test, consistent with New Jersey law, but the court declined.

The reason was that the policy language in the prior knowledge exclusion omitted the subjective portion of the hybrid test and provided only an objective test—whether a reasonable professional in the insured’s position might expect a claim or suit to result. Applying the policy’s objective-only prior knowledge test, the court concluded that, based on the allegations in the probate action, a reasonable attorney would believe that an insured breached a professional duty or foresee that a wrongful act might be reasonably expected to be the basis of a claim against an insured.

Specifically, the court noted that the probate lawsuit sought to disqualify the law firm’s attorney for conflicts of interest and his knowing and intentional facilitation of tortious asset transfers. The probate lawsuit also expressly referenced the firm’s alleged fiduciary violations, invoking the model rules of professional conduct based on the firm’s provision of legal services to both the claimant and his wife for many years.

Given those alleged conflicts, knowing and intentional conduct, and fiduciary violations, the court found that the probate lawsuit demonstrated that a reasonable attorney would either believe that the insured breached a professional duty or foresee that the insured’s actions might reasonably be expected to be the basis of a future claim. The court acknowledged that a formal malpractice claim was not required to trigger the prior knowledge exclusion. But because the policy's prior knowledge exclusion only required that a reasonable person believe that a malpractice claim may arise or that an insured breached a professional duty, the court concluded that the insurer had met its burden to trigger the exclusion as a matter of law. Thus, the law firm did not have coverage for the malpractice lawsuit.

The court’s decision emphasizes the importance in understanding what constitutes “prior knowledge” when applying for a new insurance policy, as even objective knowledge can constitute “prior knowledge” in some instances.

Governing Law Matters, but Policy Language May Override Default Rules

Insurance claims are determined by state law. And because all 50 states have developed their own unique body of insurance law, the outcome of coverage disputes frequently turns on what law governs.

As discussed in Ascot, for example, the test for evaluating “prior knowledge” varies materially between states but generally follows one of three standards:

1. A purely subjective test, which looks only at what the insured actually knew.
2. An objective test, which does not reference the specific state of mind of the insured in question but only considers what a reasonably objective insured should have known.
3. A hybrid subjective-objective test, which is based on what the insured actually knew (subjective) and what a reasonably objective insured would have expected (objective).

However, all of that can be put to the side if the actual policy language provides a different standard. In Ascot, the parties all agreed that New Jersey’s hybrid objective-subjective test should control, but the court dispensed with that standard where the policy required only objective knowledge.

As a result, policyholders navigating prior knowledge issues should consider both state law and how it may be impacted by the specifics of the policy.

Beware of Coverage and Rescission Risks with Broad Warranty Statements

Warranty statements pose another issue altogether irrespective of any exclusionary language. Warranty statements are often required in applications for new policies, increased limits, or similar requests to improve coverage.

Warranty statements vary materially between insurers, lines of coverage, and products but generally pose recurring traps for the unwary, especially if policyholders sign broad warranties without performing appropriate due diligence or negotiating clearer and narrower language. Key questions include:

• Is the warranty limited to a particular insurer, policy, or purpose?
• What kind of representation is being made, whose knowledge is relevant, and what if any guardrails are in place to dictate what does or does not need to be done to obtain that knowledge?
• What kind of knowledge is relevant—knowledge of facts, claims, circumstances, wrongful acts, or something else?
• What can the insurer do if there’s a misrepresentation or omission?

The warranty statement in Ascot is illustrative of where things can go wrong. That warranty asked the law firm to agree to forego coverage if “any of the proposed Insured Persons” had knowledge of “any Wrongful Act, fact, circumstance, or situation” which “might result in a future Claim.” In theory, this demanded inquiring with every person in the firm to ask about any single fact that may result in a future dispute. While a smaller law firm may be able to reasonably undertake that kind of inquiry, how is an in-house lawyer, risk manager, or C-suite executive supposed to gather knowledge of hundreds or thousands of employees at a larger scale? Closely scrutinizing and improving or clarifying similarly broad statements can help ensure policyholders and underwriters are aligned in what representations are being made to avoid surprises down the road. What may seem like an innocuous underwriting requirement in a relatively hassle-free policy placement can take on outsized importance when a future claim arises and the insurer (or its outside coverage counsel) revisits prior warranties and knowledge with the benefit of hindsight.

Conclusion

Evaluating and addressing these prior knowledge issues when securing new policies or limits can help avoid surprise denials or policy rescission months or years later when a claim arises. Engaging with coverage counsel at each stage of the process can navigate common pitfalls to maximize recovery and preserve coverage.