Claims-Made, Retroactive Dates, and Continuity Explained
I’ve done several videos on D&O Insurance, as well as claims made policy forms in general, and today I’d like to tackle various questions relative to Claims-Made, Retroactive Dates, and Continuity in D&O Insurance and why some claims are denied.
So let’s start with what separates claims-made policy forms from occurrence policy forms.
Under an occurrence policy form such as most general liability policies, the policy that responds to a claim is the one that was in effect when the loss occurred. Claims-made, Retroactive Dates and Continuity in D&O Insurance may be a policy from three years ago, it could be the current term policy, it doesn’t matter. The occurrence date of the loss is what triggers the policy.
A Claims-Made policy form on the other hand responds differently. For a claim to be covered under a Claims-Made Policy, the claim must be first made against the insured during the policy period (or extended reporting period which we’ll discuss later), and it must be reported to the insurer on time. Where many insureds run into trouble is that they are served a summons or receive some other notice that would qualify as a claim in the policy and they ignore it or put it to the side and don’t consider it serious enough to report to their insurer. If the claim heats up 3 months later and then they decide to report it, it could be denied for the late notice.
Now let’s say the act which gave rise to the claim happened 3 years ago. Is it covered?
That depends and brings us to the subject of retroactive dates and policy continuity.
To answer that question though, if there has been no break in the continuity of coverage and coverage was in effect 3 years ago, then it should be covered.
So, let’s first answer the question,
What is Continuity?
Continuity as its name implies is the ongoing continuous ribbon of coverage that is not broken by renewal or changing insurers. If you took out your first D&O policy 10 years ago and had ongoing continuity, great – you’ve got coverage for acts that may have been committed 10 or fewer years ago if the retroactive date was set at the inception date of the first policy.
If there was no retroactive date, meaning full prior acts were provided, then you’ve got coverage back to the inception of the company.
So, how does continuity get broken?
Let’s say you are evaluating your renewal options on your D&O policy and your broker presents you with 3 different options. If you select one of those options because it’s much less expensive, but you didn’t check the continuity date, you could have a problem. On each renewal for D&O insurance, you need to complete a renewal application, regardless of whether you’re staying with the same insurer or switching insurers. At the end of that application is a warranty statement that asks if you or anyone covered by this insurance has any knowledge of a situation that could give rise to a claim under this policy, if the answer is no, then the insurer should honor the continuity date of the prior policy – again, let’s say that’s from 10 years ago. But if you completed a new rather than a renewal application and the insurer proposing lower premiums didn’t acknowledge your continuity date, then the continuity is broken and you’ve only got coverage for acts that occurred as of the new retro date.
Now, let’s take this from another angle. Let’s say you take out a D&O policy on January 1, 2021, and your retroactive date is what we call at inception – meaning 1/1/21.
You are served papers that constitute a claim in June of 2021 and submit them immediately to your insurer.
Are you covered?
You are only covered in this situation if the wrongful acts which gave rise to the claim took place between 1/1/21 and the first notice of claim meaning June 2021, because the retro date was inception.
If there was no retro date and you had full prior acts on this D&O policy, then this claim would be covered.
What’s the difference between a Retroactive date and a Continuity date?
In many instances, they are the same if there’s been no break in continuity. The retro date is the earliest possible date for which you can claim your D&O policy. The continuity date is the earliest date of continuous coverage before a break or gap in that coverage.
The bottom line is that when you’re first buying D&O coverage it will set the retroactive date. As mentioned, it could be open and provide full prior acts back to the inception of your firm or it could be the inception or effective date of that first policy. You should make every possible attempt to maintain that date for continuity purposes so that all potential prior acts are covered. Breaking that continuity resets the retroactive date and limits potential recovery for claims.
I also think this is another reason why working with an expert in the field of D&O and other management and professional lines of insurance are important. An unskilled broker working in this area without the right experience could propose coverage as I described earlier and you’ve shortchanged your coverage without even knowing it.