The purpose of an insurance policy is to protect an individual or business when a claim is filed against them. Generally, this coverage happens within the parameters of the contract. Once the policy is canceled, the coverage disappears as well.
Still, there are situations when coverage is implemented for previously created claims in order to protect the assets of a business. Claims during these times, known as retroactive dates, aren’t dealt with by the company alone. The insurer may help to pay a majority of the legal fees and reimbursement to the plaintiff.
The period that an issue is covered prior to insurance activation is known as a retroactive date. It’s a feature of claim-made policies like errors and omissions (E&O) or professional liability. In environments where companies utilize these forms of insurance, adjusters and underwriters consider if a previous issue should be covered or rejected.
The retroactive date is normally used when a company or professional attempts to maintain their coverage between an old and new policy. If a claim is started at the previous insurer, the next one might take it over so coverage isn’t broken.
On the other hand, this doesn’t work if a business or professional purchases an E&O or another policy from scratch. In other words, a retroactive date for a first-time policyholder only goes back to when they signed the contract. If there were issues before that, the insurer might not accept them.
With a retroactive date in place, an insurance policy can cover claims that are months or years old. Overall, it depends on the insurer’s qualifications. However, there is one stipulation that’s critical no matter the company. The professional or company must not have a gap in coverage.
Let’s say a company decides to switch insurance companies for a less expensive premium. If the owners simultaneously stop the old policy and start the new one, then there’s a good chance the latter will cover previous claims. The new policy may even cover issues that took place years before.
However, this wouldn’t happen if, while searching for a new insurance company, the company had to stop coverage for several weeks or months. Even if owners eventually signed up with a new insurer, claims that came in during the limbo months would have to be paid out of the business’ pockets.
There are endorsements and other types of riders that would help close these gaps between coverage. Nose or tail coverage would allow a company to be protected as they looked for a new policy. While there is an extra cost to these items, the security they provide can be a wise investment for some companies.
In situations when there isn’t a coverage gap, the insured must stress to their new insurer that the retroactive date can’t be the first day of their new coverage. Ideally, it would be the earliest date of when the company or professional was insured. Thus, if coverage started with the old policy two years prior, then the retroactive date should reflect that.
The Potential for a Gap
In some cases, a business or professional won’t be able to get a new policy in time. A lack of funds may stop one from paying existing premiums and shopping for a different insurer. Therefore, the previous policy might be canceled.
Should this be the situation, the insured needs to speak with their old policyholder when they get their finances in order. This should hopefully resolve issues so that they retain their retroactive date instead of creating a new one.