Professional Liability Insurance – Beware of a Lapse in Coverage

Most E&O policies are written on “claims made” basis. This means that the policy covers claims that are reported during the current policy period, even if the claim happened in the past. However, there are two criteria that need to be met in order for the insurance company to respond to the claim. First, you must have an E&O policy in force at the time a claim is made. Second, you must have had continuous E&O coverage from the time of the incident to the time the claim is reported.

The starting date of your continuous coverage is called the retroactive date which is the earliest date an event would be covered. Usually, this is the date you first started your E&O policy. However, should you lapse your policy for any period of time, and then start another policy at a later date, your retroactive date is reset to the date the new policy started. So, if you let your E&O policy lapse, you will not be covered for claims that occurred prior to your new retroactive date, even though you had insurance at that time.

As an example, suppose you had an E&O policy in force for 5 years. In your 6th year, you let your policy lapse due to financial reasons. Sometime after that, your policy is reinstated. In your 7th year, you receive a letter from an attorney representing a former client. Apparently, the former client is unhappy with some work you did 4 years ago and is suing you for $100,000. You submit the claim to your insurance company and are shocked to hear that the claim is being denied, even though you had insurance at the time you did the work for the client. Due to the lapse in your policy and subsequent reinstatement, your retroactive date is now the date of the reinstatement and not the date your first policy started 7 years ago. As a result, you may be personally liable for the suit of $100,000 plus defence costs.