Directors and Officers Insurance Retroactive Date Explained
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An Introduction to Directors’ and Officers’ Insurance
Nearly every company can benefit from Directors’ and Officers’ insurance. Directors’ and Officers’ (D&O) insurance policies can protect current, former, and future directors and officers from allegations of wrongful acts brought by stakeholders.
Directors’ and Officers’ insurance policies are written on a claims made basis. What this means is that the policy in force at the time that a claim, or first knowledge of a potential claim, brought forward in will respond. This is an important feature of D&O and E&O insurance policies, but can be limited depending on conditions set forth within the insurance policy. Regarding Directors’ and Officers’ insurance policies, it is important to note how the retroactive date can affect your coverage.
How A Directors and Officers Insurance Retroactive Date Affects Your Coverage
The dictionary definition of ‘continuity‘ is; the state or quality of being continuous. Therefore, the continuity date, as it pertains to D&O insurance policies, is the date that continuous coverage — that is coverage without any gaps — has been maintained. Often times, the continuity date is the date to which D&O insurance was first obtained.
Maintenance of the continuity date is especially important when moving an existing D&O policy with one insurance company to another. The reason for this is because of the warranty statement that is often found in D&O insurance applications. The warranty statement is an important and critical part of the D&O risk placement process as it creates the possibility that a claim could be denied by the insurer on the basis of prior knowledge. An example of what a typical warranty statement looks like is; “Is any person or entity proposed for this insurance aware of any fact, circumstance or situation which may result in a claim against the organization or any of its directors, officers or employees?” By the new insurer honouring the continuity date from the previous policy, the effective date of the warranty statement from the initial D&O insurance policy will remain unchanged.
Directors’ and Officers’ insurance policies typically provide coverage for historic wrongful acts that happened after the retroactive date, so long as the insured had no knowledge of them. The retroactive date on D&O policies specifies how far back in time the retrospective cover applies. When a retroactive date is included in a D&O policy, an insured may find themselves without cover in the event of an alleged wrongful act that took place prior to the retroactive date.
An example to illustrate the impact of a retroactive date;
John Doe Inc. has been operating for many years when they decide to purchase D&O insurance. When the D&O insurance policy is issued, it is done so with a retroactive date of inception– in this case January 1, 2010. Part way through the policy period a possible claim for an alleged wrongful act occurring in 2008 is brought to the attention of John Doe Inc., who immediately reports this to the insurance company. Because the wrongful act took place prior to the retroactive date on the policy, in this case prior to January 1, 2010, coverage for the claim would be denied. Taking the same scenario, had there been no retroactive date on this policy and no prior knowledge of the alleged wrongful act, cover for the claim would have been granted, assuming there were no other conditions within the policy that would limit cover.
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Other posts related to Directors and Officers Insurance Retroactive Date Explained:
1. What is a retroactive date in insurance?
A retroactive date in insurance is basically a limit placed on an insurance policy that disqualifies any acts from being covered that took place before the retroactive date. If your policy includes a retroactive date, it is basically the earliest date for which you have coverage or, in other words, it’s as far back as your policy goes.
One of the reasons why an insurance policy will include a retroactive date is to eliminate claims for incidents an insured knows about and is trying to cover themselves for after the fact. This is like trying to buy car insurance after you’ve been involved in a car accident to try and avoid liability (and a driving without insurance charge).
Another reason insurance companies include a retroactive date on a policy is to make policies, like D&O insurance, more affordable. If insurance carriers provided coverage for events that took place before the retroactive date indefinitely even if the insured wasn’t aware of them, the price for that policy would be too high. So by reducing the number of potential claims, insurance companies are able to offer coverage that fits comfortably within an organization’s budget.
2. What is the difference between retroactive date and continuity date?
As discussed in the question above, the retroactive date is essentially the earliest possible date for which you can make a claim on your D&O insurance policy, for example. The continuity date, or more specifically the earliest date of continuous coverage, is just that – the earliest date that your coverage can be traced back to before any break or gap in your coverage.
If you’ve used the same insurance company since you first began your coverage and you’ve maintained your coverage throughout, then your retroactive date and your ‘continuity date’ should be the same.
If you change insurance companies, your current insurer may not grant continuity, as explained in the above post, resulting in a gap in your coverage. The importance of maintaining continuity is discussed in the question below.
3. What does claims made policy mean?
Claims made policies are policies that are triggered when a claim is made even if the event that gave rise to the claim took place years before the current policy period. Claims can be made (as long as the insured was unaware of them) as far back as the retroactive date or the earliest date of continuous coverage if there were any gaps in coverage. This is why maintaining continuity is so important and switching insurance companies for your claims made policies is generally unadvisable, even for a cheaper premium.
Common examples of claims made policies are D&O insurance and Employment Practices Liability (EPL) insurance. Btw, if your organization needs D&O insurance, it also needs EPL insurance.
4. Why don’t some policies have retroactive dates?
Policies that don’t have retroactive dates provide full prior acts coverage that does go back indefinitely. Full prior acts coverage is sometimes granted if an insured already has coverage in place at the time of application. Contact an ALIGNED advocate to find out if you qualify for full prior acts coverage.
5. What is usually excluded from cover?
Claims that are excluded from a claims made policy include any prior or pending litigation that is known to an insured; claims where an insured had knowledge of the claim, including the facts or circumstances of the claim, prior to the time the policy was written and claims that have been previously reported to another insurer, among other possible exclusions.