You know how important it is to protect your business from professional negligence claims if you have purchased professional liability insurance. It is important to know why your policy should not be cancelled as long as you are in business.
Claims Made Vs. Insurance Policies for Occurrence
Also known as errors and omissions insurance or E&O insurance, professional liability coverage comes into play when and if a client should allege that you or someone you employ made an error or omission in the course of doing your job, causing the client a financial loss. In such cases, E&O claims insurance would pay for your legal defense as well as any settlement the court orders you to pay as compensation to your client, for any covered claims up to the limits specified by your policy.
Most professional liability policies are written on an claims-made basis, rather than an event basis. This means that coverage is dependent on two factors: the date the alleged error or omission occurred and the date the lawsuit is filed.
Retroactive Date Of Inception
You should keep your policy’s termination date, and its retroactive inception date in mind. What is a retroactive inception date? Also known as “prior acts coverage day”, your retroactive coverage (a.k.a. Retro date determines when your coverage began. Most policies will have this date as the date you bought your first policy. Some comprehensive E&O insurance plans also offer prior acts coverage, in which cases your retro date may be a date prior to your policy purchase.
A claim can only be covered if the alleged error/omission is covered by the policy. It must have occurred before the policy’s expiration date but after the retroactive date. You must also report the claim to the insurance carrier within specified time frames.
So, let’s say you bought your errors & omissions coverage June 1, 2008, and that’s your retroactive date of inception. You are not protected for any claims that you might have made in relation to errors or omissions before this date. The effective date of your policy’s termination was May 31, 2009. However, you renewed it to ensure that you have continuous coverage. Your renewal date was June 1st 2009. Therefore, your new termination date will be May 31st 2010. However, your retroactive date for inception is June 1. 2008. Covered claims for work occurring between June 1, 2008 and Mai 31, 2010, will be covered as long as they’re reported to the carrier while your policy remains in force.
But what happens if you choose not to renew your E&O policy? Let’s say a client hires you to do a project, but stipulates in the contract that you must purchase E&O insurance for your business. You decide to let the insurance policy lapse after the contract is completed. Your client files a lawsuit against you, claiming that it can trace the source of the financial loss to a mistake you made during the project. Because your E&O insurance policy is no longer in force, you have no coverage for that lawsuit – even though the policy was active when the error was made.
Your retroactive coverage dates don’t matter. If your claims-made policy expires, you lose your coverage for any acts before that. Coverage could end for years. Your coverage begins all over again with a retro date on the day you reinstate your policy.
This means that premiums will be required to keep your professional liability policy current indefinitely.
You can buy coverage that extends beyond the expiration date of your policy. This will allow you to continue coverage for any claims after your business ceases. This extension is known as “tail cover” and typically lasts between one and five years.
Tail coverage covers only claims relating to errors or omissions made after the retroactive coverage date. This applies to all claims that occurred while your business was operating. It doesn’t cover work done after your business has shut down.
Prices for tail insurance vary depending on the coverage. Also, there are different lengths of coverage. Talk to your agent or broker about details.