The truth about Retroactive dates

So…we would like to set to record straight regarding retroactive dates!

I have been watching a couple of educational videos and articles recently posted by other insurers and surprisingly the articles contain information that is unintentionally misleading. Thus, we are writing an article on retroactive dates to correct some of the mis-information recently posted.

A retroactive date will often (if not always) appear in claims made policies such as Professional Indemnity. The effect of the retroactive date is to exclude any claim arising out of an act, error or omission that took place before the retroactive date.

As an example let’s say the retroactive date is 1 Feb 2019 and the policy incepted 1 March 2020. A claim is then made against the insured and notified to the insurer on 31 March 2020. If the act, error or omission that led to the claim happened prior to 1 Feb 2019 then the claim (or that part of the claim that related to the act, error or omission that happened prior to 1 Feb 2019) will be excluded. If the act, error or omission happened after 1 Feb 2019 then the claim is covered (in terms of the retroactive date).

When an act, error or omission occurs and when the allegation is made against the insured are two different things.

For example: What if my accountant makes a mistake on my tax return on 1 August 2019 and I tell the accountant about it on 1 April 2020? Here, the act, error or omission takes place on 1 August 2019, however, the allegation was made on 1 April 2020.
For the purposes of determining cover in regards to the retroactive date, it is irrelevant when the allegation was made against the insured. The only relevance was when the act, error or omission took place. One video I watched, suggested that it was when the allegation was made that must be prior to the retroactive date and this is not correct.

The retroactive date is usually stated in three different ways:

  1. The actual date – e.g. 14 November 2018
  2. Unlimited – there is no retroactive date and thus all acts, errors or omissions are covered whenever they occurred
  3. As expiry – this means the same date as in the professional indemnity policy that has just expired. This usually appears in a quote and the insurer doesn’t issue the Schedule until they have a copy of last year’s schedule so that the expiring retroactive date can be confirmed.

Insurers will usually provide retroactive cover from when the insured first purchases claims made insurance. This is done to ensure that insurers receive premium for all the acts, errors or omissions they are covering. Otherwise insured’s purchase the cover many years after they start offering services and insurers provide cover for all those years but receive no premium.

Insured’s should purchase Professional Indemnity insurance from the date they first start offering their services. If this is done, then all the Insured’s acts, errors or omissions will have been performed after the retroactive date and the retroactive is no longer relevant.

There are other situations where a retroactive date can be applied such as:

  • when a new entity is added to the insurance policy. If this entity hasn’t been insured before then the retroactive date for that entity will the date it gets added to the policy.
  • when an insured has had a turbulent history and the insurer wants to cut itself off from that history. For an insured that has brought in new management to clean up the company this is often the only way insurance can be offered because the potential for claims from the old management is too significant for insurers to want to take on. Having the retroactive date gives the new management time to create a new claims history for the insured.
  • If the insured has changed its activities and the old activities are not one that the insurer wants to cover.
  • If the insured has purchased a higher limit of insurance some insurers will only apply the higher limit to the acts, errors or omissions that took place after the higher limit was purchased

FTA has a level of flexibility in applying retroactive dates and always seeks to provide a balance between the interests of the insured and that of the insurer.