Last updated: 14 May 2022
If you’re taking up professional indemnity insurance coverage, you’ve probably heard of the term “retroactive date” when arranging your policy. It’s a very important part of any liability insurance policy, so if your agent/broker didn’t walk you through what it means, maybe it’s time to switch to a better broker. (Hint: we’re really good at what we do.)
A retroactive date is the date from which your business has had uninterrupted professional indemnity insurance. From this date onwards, all liabilities you incur (subject to your policy’s wording, exclusions, etc.) will be covered by the insurer, no matter how far in the past they happened.
This means that if you’ve held continuous professional indemnity insurance coverage (with no lapses in coverage) from the day you started your business, you’ll be covered for all the years of services that you’ve provided in the past. So, even if you a lawsuit arises from work you did 10 years ago, you’ll be covered – as long as you didn’t have breaks in coverage!
If, however, there was a period of time when you did not hold professional indemnity insurance (for example, you cancelled your policy following the end of a contract or chose not to renew it), you will only be covered for work since the start of your new insurance policy.
What is the purpose of retroactive dates in professional indemnity insurance?
Retroactive dates are meant to exclude coverage for claims that arise before you bought professional indemnity insurance. They also function as a powerful incentive to keep your professional indemnity coverage continuous, because you’ll be covered for liability that might have occurred long ago but has only recently resurfaced to haunt you.
Retroactive dates are found in all professional indemnity insurance policies. This is because professional indemnity insurance is issued on a “claims made” basis (“claims made and reported” is the full technical term). This means that your policy will protect you from claims you make with your insurer while your policy is active, even if the event you’re claiming for events occurring before you bought your current policy.
What are the requirements to filing a claim under a “claims made” Professional Indemnity policy? There are 3 essential requirements:
- You must have had coverage when the incident occurred
- You must have coverage when you’re reporting the claim to the insurer
- There can’t be lapses in coverage between the incident date and the reporting date
What are examples of how retroactive dates work?
Retroactive Date Example #1:
Let’s say you run a financial advisory firm. You provide M&A advice to a client. The deal closes and you move along, happy to have collected handsome fees. You had professional indemnity insurance during this period.
Right after the deal closed, you saw no need to continue paying for professional indemnity coverage. You allow the policy to lapse, and then buy a new professional indemnity policy later on.
However, several months after the deal closes, your client comes back to allege that you provided negligent advice on their deal. You file a claim with the insurer. Unfortunately, the insurer notifies you that you aren’t eligible for coverage, because you’ve had interruptions in your liability coverage. Your retroactive date is after the date of the incident you’re being sued for. Unfortunately in this case, you’ll have to pay for your own legal costs and damages – which are likely to be hundreds of thousands (or even millions) of dollars. If you had instead chosen to maintain your professional indemnity insurance, you would have been protected and the insurer would have stepped in to pay the costs for you.
Retroactive Date Example #2:
You run a construction company. In 2018, you finish a big project for a client. In 2022, this client discovers structural issues with the building. With the help of a building inspector, they determine it was your employees’ shoddy work that caused these structural instabilities. Your client sues you for negligence. You have held uninterrupted liability cover from 2018 to 2022.
When you file a claim with the insurer, you’ll be covered. Because you’ve held continuous liability cover, your retroactive date will be before the claimed incident. You won’t have to pay for legal costs out of your own pocket.
What are the different types of retroactive dates?
There are 2 main types of retroactive dates that you can request when purchasing professional indemnity insurance.
Type 1: Unlimited Retroactive Date
If your policy states that you have an unlimited retroactive date, it means that you will be covered for all work you’ve performed, regardless of how long it was done. You must still maintain active professional indemnity insurance to enjoy protection, but the insurer will not impose a time limit on the work that was done, even if it was a long time ago (e.g. 10 years ago).
Professional indemnity insurance policies with an unlimited retroactive date will cost more than policies with a specific retroactive date.
Type 2: Specific Retroactive Date (e.g. 1 January 2022)
If your policy contains a specific retroactive date, this means that liability for any work you performed before that date (e.g. 1 January 2022) will not be covered.
Specific retroactive dates are more commonly seen than unlimited retroactive dates.
How do retroactive dates work if I switch insurers?
Some insurers will provide you retroactive coverage even if you’re switching from another insurer, as long as you’ve held continuous coverage. However, other insurers will require that you’ve held continuous coverage with them only. This is completely dependent on the insurer you choose. If you’re shopping for a new professional indemnity policy, and you’re unsure which of these terms will apply, make sure to speak with an insurance broker – they’ll be the best person to assist you.
Send us an email at [email protected], or call us at +6588747011, if you are looking to switch Professional Indemnity insurers, and need advice on transferring your retroactive date.
How should I protect myself from liability for past work?
Easy: ensure your professional indemnity insurance is active at all times. Don’t let your cover lapse. Make sure you renew your policy. Although you might see it as an unnecessary expense, the amount you’ll pay for renewing your policy each year is much smaller compared to what you’d pay to defend a lawsuit. Many legal claims aren’t filed immediately against businesses – clients often don’t discover the negligence right there and then in the middle of busy projects. In fact, many claims against your business will happen several months, or even years, after the alleged negligent act occurred.
Always remember: Because retroactive dates function as a coverage cut-off point, dropping liability coverage for even one single day could cause you to lose all lawsuit protections if you get sued in the future. Without prior coverage for past work, you’ll be left completely exposed when your client’s lawyers come knocking at your door. You think you might be able to save a few thousand dollars, but you could very well instead be left with a legal bill for hundreds of thousands (or even millions of dollars). Professional liability is serious, and if you’re not careful could permanently damage the business you’ve worked so hard to build. Maintaining continuous coverage is something business owners must take very seriously!
How long should I keep professional indemnity insurance active if my business is no longer around?
It really depends on what kind of business you used to run.
Businesses that are exposed to large amounts of potential liability, like construction-related businesses, may need to keep professional indemnity insurance active for many years (e.g. 5 years or more) even after they stop operating their company. This is because structural defects that can result in lawsuits commonly occur only years after the project is completed. An architect or construction contractor could complete a project successfully, but get sued only 5 years later when defects in the building start showing up.
In general, a rough rule-of-thumb would be to keep your professional indemnity insurance active for at least 3 years after you’re no longer running your business. A minimum of 3 years strikes a balance between maintaining protection and maintaining a reasonable amount of insurance expenditure. If you understand the severity of legal costs enough to purchase professional indemnity insurance in the first place, then ensuring you renew your policy even after your business closes should be a natural thing to do. The last thing you want is to close your business, retire into the sunset (or start another business), and then find legal papers being served onto you without having any insurance protection!
Where can I get great professional indemnity insurance?
You can buy Professional Indemnity Insurance on our website, within 3 minutes. Simply fill in the details below, and you can get your policy in a few clicks.