A retroactive date is the point in time that your insurance coverage begins. Your insurer will pay for claims that occur after the retroactive date. Claims that happened before you purchased the policy are not eligible, unless you choose a prior acts amendment.
What is a retroactive date?
Retroactive dates are a feature of claims-made policies, such as errors and omissions (E&O) and directors and officers (D&O) insurance. You may also see it called the retro date, or retroactive date of inception.
An insurance policy’s retroactive date is generally defined as the day that coverage begins. This date determines whether the insurer will cover a claim. If your business is sued for professional negligence on a project it worked on two years before you purchased E&O insurance, your provider will likely not cover lawsuit costs. That means you could end up paying the expenses out of pocket.
If you had previous E&O or D&O insurance policies, the retroactive date would be marked as the earliest point that your coverage was continuously active. Canceling and then restarting coverage effectively resets your retroactive date, leaving your business unprotected until the new policy period begins.
Why is your policy’s retroactive date important?
Retroactive dates are crucial in the event of an expensive lawsuit. They also serve as a reminder of the risk of letting coverage lapse.
For example, a cybersecurity consultant has a $1 million E&O insurance policy but forgets to pay the premiums. As a result, the insurer cancels coverage. During the lapse, the consultant installs a firewall for a client but fails to patch a crucial vulnerability that leads to a data breach.
Six months later, the client files a $500,000 lawsuit for damages. However, since the E&O coverage was not active at the time of the work error, the consultant would have to pay any court costs, attorney's fees, settlements, or judgments.
To protect against insurance lapses, ask your provider if it offers prior acts coverage, also known as nose coverage. This policy addition will revert protection to your original retroactive date and cover lawsuits that result from events that happened when your insurance was inactive.
Keep your retroactive date when switching insurance policies or providers
You might switch insurance providers if you can find more comprehensive E&O coverage for the same price or less.
When changing insurers, you will often have the option to keep your original retroactive date, but make sure you get it in writing. Double-checking your policy’s details will offer you a broader safety net and help prevent major financial losses in the event of a lawsuit.
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