A lot have been said about the importance of the retroactive cover of an insurance policy however people struggle to understand what it really is and subsequently its importance. Below you can find a brief explanation of what retroactive cover is and how it works.
Retroactive cover ensures that you have continuous cover for claims which you are currently unaware of that might arise from rendered services provided by you in previous years. If you insurance documents do not indicate the retroactive cover you will not be provided indemnity for any claims that may arise from services provided by you or your firm prior to the start date of your current policy period.
As such, we can claim that retroactive date is, the starting date of your first insurance policy. The insurer will pay for any claims (as per policy terms and conditions) that occurred after that date (the retroactive date) as long as the insured had uninterrupted cover since the first policy.
Following you can find some examples on how the retroactive cover works:
ABC Ltd holds an interrupted professional indemnity insurance policy since January 1st 2008. The company decided not to re-new the policy after expiration on December 31st 2013. On February 7th 2015 ABC Ltd purchased a new policy. On October 10th 2015 a client sue the company for misleading advice which occurred back in 2009. Due to the fact that their insurance policy was interrupted in 2013 the insurance policy could not be activated even though the case was filed against the company for a period where they had a professional indemnity insurance.
Why the claim was denied? The claim was denied because the new retroactive date was February 7th 2015 (the first year the retroactive date coincides with the inception date). Had ABC Ltd continually held cover –despite perhaps with different insurers- the claim would have not been denied.
Therefore it is very important to hold your professional indemnity insurance uninterrupted, because even if you interrupt your policy just for a day the coverage you accumulate for so many years will be lost. Consequently, if a third party sue you for an error or omission that occurred before the interruption of your cover, the insurer will not be able to compensate you.
XYZ Ltd holds an uninterrupted professional indemnity insurance policy since January 1st 2010. On November 24th 2015 a client sue the company for misleading advice which occurred back in 2011. Due to the fact that XYZ Ltd had a policy in place when the claim occurred as well as when the claim was reported the insurance policy was activated.
Why the claim was accepted? Even though the case was filed against the company for a period other than the current insurance period XYZ Ltd had a policy in place uninterrupted since 2010.
Consequently, it is very important to make sure that each year you renew your insurance policy on time and make sure the retroactive date is mentioned on the policy schedule. Especially if you choose to chance insurers, the new insurer will have to be informed by you on your retroactive cover. It is your responsibility to inform your new insurer of your previous cover.