Imagine this scenario: you’re an IT contractor and you’re about to purchase Errors & Omissions Insurance. You know two things to be true:
- An E&O policy can help you pay for claims arising from your professional work (e.g., a client suing you because you set up their network poorly).
- Lawsuits like this can occur months, or even years, after the fact.
Will your new technology E&O insurance offer coverage if you wake up one morning to find you’re being sued for a poor job done months before? With prior acts coverage, it just might.
Retroactive Insurance: Coverage for the Past
Most Errors and Omissions Insurance (also known as Professional Liability Insurance) policies can be written to include a retroactive date. Any E&O incidents that occur after this date and before the end of your policy term can be covered as long as you report the claim during your policy period.
Say you purchase a Professional Liability Policy that is active for a full year starting on June 1, 2016. It comes with a retroactive date of February 1, 2016. And then…
- You’re sued on June 10, 2016, but the incident you’re being sued over took place on February 20, 2016. Your insurance could cover the claim because the incident took place after the retroactive date.
- You’re sued again on June 15, 2016 (not a good month for you, huh?), but the incident for this claim took place in January 2016. Because this incident happened before the retroactive date, you won’t be covered for this claim.
Think of retroactive coverage as insurance that extends into the past, covering your tracks in case a lawsuit is close behind. It won’t cover your entire past body of work – just the time period written in your policy. This is otherwise known as prior acts coverage.
Take note that not every policy will include coverage for prior acts. The retroactive date may be set at the start of the policy period.
Prior Acts Coverage and Choosing a Retroactive Date
Should you have prior acts coverage? It depends on your business and its insurance needs. Consider this:
- Prior acts coverage allows you to have continuous insurance coverage, which is always a good idea.
- When you switch policies or are without coverage, your business is exposed to claims that you’d have to pay for out of pocket.
As previously mentioned, a lawsuit can show up long after the actual event took place. People may dither while finding an attorney, or they won’t immediately realize that they want to sue. Whatever the reason, if you switch insurance policies, your new insurance provider won’t want to pay for something you did in the past – unless you both agree to prior acts coverage.
If you want prior acts coverage, the retroactive date should extend far enough back that you feel confident you’ve accounted for any job, incident, or event that you might get sued for. Keep in mind that your insurance provider…
- Might have a limit for how far back they’re willing to go.
- Will likely charge more the farther back in time you set the date.
Want more detail on how your insurance policy works? See “Get to Know Your E&O: 5 Things to Check for in Your Errors & Omissions Insurance Policy.”