Could a claim over a past incident come back to bite you? Quite possibly.

Sometimes, there is a considerable delay between when an incident occurs and when a related claim is filed. If your insurance situation has changed in the meantime, you may be left with insurance coverage gaps that mean your claim isn’t covered. This can be a problem with professional liability and directors and officers insurance policies.

Below is an overview of several factors that can influence claim outcomes.

Factor #1: Claims-Made vs. Occurrence-Based Coverage

Before we can dive into retroactive dates and continuity dates, it’s important to understand the difference between claims-made and occurrence-based insurance policies.

Imagine an incident occurs in 2017. In 2018, the incident becomes known, and a claim is filed.

• An occurrence-based policy provides coverage based on when the incident occurs. In this case this case, that’s 2017. Whatever insurance you had in place in 2017 would cover the claim, assuming there are no other facts that would lead to the denial of coverage.
• A claims-made policy, on the other hand, provides coverage based on when the claim is made. In this case, that’s 2018. Whatever insurance you had in place in 2018 would cover the claim – assuming it provides coverage that goes back to 2017 and there are no other facts that could lead to the denial of coverage. That’s where continuity dates and retroactive dates come into play.

If you’ve had the same insurance policy this entire time, these nuances may seem trivial. However, if you’ve recently switched carriers, or if you went without insurance coverage for a while, these details may become relevant. In fact, they may determine whether or not you have coverage for the claim at all.

Also, in this example, there’s only a one-year difference between when the incident occurred and when the claim was made. In some situations, the time difference may be much greater. This makes it even more likely that you will have experienced a coverage change in the meantime.

Factor #2: Continuity Dates and Retroactive/Prior Act Dates

When looking at the coverage provided under a claims-made policy, it’s important to understand continuity dates and retroactive dates. Both of these dates can establish a starting point for which incidents will be covered.

• The continuity date refers to when your continuous period of coverage started. For example, if you purchased coverage January 1, 2015, and you’ve renewed your policy every year since then without letting it lapse, your continuity date is January 1, 2015.
• The retroactive (or prior act) date refers to the earliest incident your policy will cover. For example, if your retroactive date is January 1, 2014, your policy will cover claims related to incidents that occurred on or after January 1, 2014, but it will not cover claims related to incidents that occurred before January 1, 2014. Many claims-made policies specify a retroactive date, but some do not. If a claims made policy does not specify a specific retroactive date then it is assumed the policy has “full” prior acts coverage back to the insured companies date of incorporation

Factor #3: P&P Dates

A prior and pending litigation (P&P) date is another provision present on D&O policies. It’s purpose is to exclude coverage for known circumstances, or for prior/existing litigation. The P&P date is typically the same as the continuity date (the day coverage first took effect) but in some limited cases, the P&P date can be backdated to allow coverage for new claims made for yet-to-be-identified preexisting issues. A “prior notice” exclusion typically prevents duplicate coverage between two carriers.

While D&O policies are usually the only place you see P&P dates, most liability coverage contracts address the issue of prior and pending litigation in other ways.

Factor #4: Application and Warranty Statements

When businesses apply for new or renewal insurance, they are often asked to provide statements (or warranties) about their knowledge of the existence of potential liabilities. For example, the insured may need to check a box certifying that they are not aware of any act, error or omission that could result in a claim.

If later on, it becomes apparent that the insured did, in fact, have knowledge of an error or omission at the time of the coverage application, claims can be denied and, in some cases, coverage could be rescinded.

Policy warranties often have broad language and it is appropriate for a company’s legal counsel to negotiate tighter terms when completing applications. It is also appropriate to request no warranty when applying for renewal coverage.

Factor #5: Switching Carriers or Letting Coverage Lapse

With claims-made coverage, switching carriers is more complex. It’s important to understand how the new policy will treat prior acts, and what the new continuity, retroactive dates and P&P dates will be. When switching carriers, insureds may be asked to complete new application and warranty statements. If the switch would result in a coverage gap, it may not be advisable.

Letting coverage lapse can lead to similar problems. Coverage gaps break continuity. As a result, once coverage is in place again, past incidents might not be covered under a claims-made policy. To avoid facing a claim with no coverage, continuous coverage must be maintained.

Key Takeaways

Continuity questions are complex. Some insurance buyers might skip over these provisions, assuming they are just standard language, but doing so is a big mistake. For one thing, the policy will likely exclude prior events that the insured knew about. For another thing, retroactive, continuity and P&P dates within the policy language could mean that claims for prior incidents aren’t covered.

Always Check These Three Factors

Different carriers have different continuity provisions and policy language so insurance buyers must analyze and dissect the policy details every time they apply for and negotiate coverage. To truly understand continuity, insurance buyers should analyze:

1. The warranty. Companies will always have to sign a warranty with the first policy, but they can often get coverage with no warranty upon renewal – which is preferable.
2. The continuity, and P&P dates. Ideally should be backdated to the date they first purchased that type of policy.
3. Retroactive, or Prior Acts, coverage. To maximize protection, the policy should include full Prior Acts coverage.

The Socius team is ready and willing to help agents and their clients navigate coverage continuity questions. Contact us to learn more.

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