What is a retroactive date and how does it affect your insurance policy?

By Jack Durrant – Branch Director, BA (Hons), ACII

A retroactive date is something that even seasoned insurance buyers may not notice in their policy wording, so let’s explore the background before we dive into the details.

Logic, for many policies, suggests that you buy an insurance policy and, “providing that any claims arise during the period of the policy being active”, the insurer should support the policyholder in the event of costs arising because of the claim. So far, so straightforward.

This is usually the case. And that’s just how it should be. 

But what about those policies which pay out claims for activities performed by the policyholder long before the policy was ever in place? 

It’s at this point you may say “Wait, what? Doesn’t this mean that people can just buy policies after the event of something happening, meaning they can delay purchasing a policy until they know a claim will arise?”

My answer to that? Absolutely not.

There are several factors which prevent insurance buyers from doing this:

1. If insurers know that a claim is due to arise before offering a policy, they won’t want to offer policy cover in the first place.
2. If these policies are for specific activities for which potential claims might not be known for many years after the activities are completed. For example, an architect building design defect may go unnoticed for decades or more.
3. Many types of insurance have a legal requirement to be evidenced, such as employers’ liability insurance, or insurance for vehicles used on public roads. Without insurance you risk receiving fines or sanctions.

The type of policies we know about and that are commonly used are ‘Claims Occurring’. For instance, a business has an employers’ liability insurance policy that will pay out a claim if an employee is injured in the course of their work, and the employer is seen to be the negligent/at fault party. The client has the insurer ‘ABC Insurance’ covering this policy and as such, if an injury occurs to a member of staff, then ABC Insurance should indemnify the loss.

The other type of policy is ‘Claims Made’, which is what we touched on a little earlier. This is usually found in professional indemnity insurance whereby companies are selling their advice in exchange for fees - accountants and architects for example. These professionals would be acting negligently if they didn’t indemnify themselves immediately when undertaking work or contracts. So, they can’t operate free of the cost of insurance policies – it’s quite the opposite because costs for professional indemnity have increased substantially. 

An architect can happily go about designing buildings for 15 years, undertaking ever more complex work as they go on. Let’s say that XYZ Insurance was their first insurer 15 years ago. Because the architect subsequently changed to another insurer, XYZ Insurance is no longer the insurer on risk for any future loss. Therefore, even in the event that design activities undertaken in year one of a fifteen-year project are at fault for subsequent major design flaws, the insurer currently insuring the architect will pay a claim for the loss.

And now you may be asking: “What’s all this got to do with retroactive dates?”

Well…the second insurer wasn’t happy about the activities that the architect undertook in his first year of practice, and hence applied a retroactive date to the policy from the second year of practice. This means that the second insurer has absolved themselves of the first year of the architect’s activities. XYZ Insurance would need to cover any claims arising from activities prior to the date of the retroaction, and nothing further.

Other reasons insurers might choose to implement a retroactive date may be if a company does not have any previous evidence of insurance. Insurers would think that this is a moral hazard and not want to incur any potential losses which the policyholder has chosen to self-insure (or where they could not obtain another policy).

In any event, whatever type of policy you need to obtain, it’s important that you are covered for the activities you perform right from the start. If you’re not sure if you have a retroactive date on your current policy, or if you want to understand a little more about whether your current policy is Claims Made or Claims Occurring, just get in touch with Jack Durrant on [email protected] or call 0161 2141120. 

Insurance policy timelines: 

Outcomes of insurance policy timelines:

• Example A – Policy is placed with XYZ Insurance with a retroactive date of 01.01.2019 and renewed each year maintaining the date, so full retroactive cover applies.
• Example B – Policy is placed with XYZ Insurance with a retroactive date of 01.01.2019. It transfers to an alternative insurer in 2021 and 2022, but the retroactive date of 01.01.2019 is maintained so full retroactive cover applies.
• Example C – Policy is not purchased until 2023 but XYZ Insurance agrees to a retroactive date of 01.01.2019 so cover applies all the way back to this date. This example would rarely be achievable but is shown to illustrate how retroactive cover could apply.
• Example D – Policy is placed with XYZ Insurance with a retroactive date of 01.01.2019 but the policy is cancelled at renewal in 2021, so all cover is lost.
• Example E - Policy is placed with XYZ Insurance with a retroactive date of 01.01.2019 but the policy is cancelled at renewal in 2021. Cover is replaced in 2022 with TTT Insurance but with a retroactive date of 01.01.2022 so there is no cover before this date.