What is a retroactive date in professional indemnity insurance?
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 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 dat
What are examples of how retroactive dates work?
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.
Example #2: You run a construction company. In 2018, you finish a big project for a client. In 2020, 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 2020.
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.
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 your broker – they’ll be the best person to assist you.
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 the premium is much smaller compared to what you’d pay to defend a claim. 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.
Important note: Because retroactive dates function as a coverage cut-off point, dropping liability coverage for even one single day can have significant impacts on your business years later. Maintaining continuous coverage is something service business owners must take very seriously!
Always remember: If you allow your cover to lapse for even one day, you could face incredibly damaging consequences years later. 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). Service liability is serious, and if you’re not careful could permanently damage the business you’ve worked so hard to build.
How long should I keep professional indemnity insurance active if my business is no longer around?
A good gauge is to keep professional indemnity insurance active for 3 years after you’re no longer running your business. Usually, any discovery of service defects or negligence would have been brought to your attention within this time frame. For very large and complex deals, you might want to consider having your professional indemnity policy live for up to 5 years. 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.
Where can I get great professional indemnity insurance?
You can get broad-cover, tailored and affordable professional indemnity insurance here. Provide offers tailored professional indemnity protection. You’ll save up to 25% on your premiums.