When should you buy a professional indemnity (PI) policy? On the assumption that your business needs it, that you offer advice or professional services for example, then you should consider buying a policy from the first day you start trading.
Well, I would say that, wouldn’t I? I work for an insurer. Yes, of course…. but there is a reason why the date your policy cover starts from is important.
Let’s say I set up a business, Newman’s Widget Consultancy, and run my business happily for a year – adding clients and growing my revenue as I do. I’m small, money is tight, it’s only me – I don’t make mistakes (see previous blog post here), and even if I did, I believe my clients are lovely people and would never sue me. So I don’t buy PI.
The following year, I take on a new and significant client – this could be a local authority or perhaps a big corporate firm. Whoever it is, they require me to carry PI as part of my contract, so I do, buying a policy without any particular difficulty, and sleep well at night knowing that if anything should go wrong, I am now protected. At least that’s what I think.
A few months later, a claim comes in to Newman’s Widget Consultancy from one of my early clients regarding work I did for them during my first year of trading. I feel awkward, but call my insurer to notify them. My feelings of awkwardness turn to feelings of horror when, on due consideration, my insurer declines the claim. How can this be? I’m insured, aren’t I?
This is where the term retroactive date becomes important for small businesses. When buying a policy, one question you will be asked is from when you want the policy to run. If you have an existing PI policy in place, you should tell the new insurer the date that existing policy started – this becomes the “retroactive date”.
The new policy will then start (the “inception date”) and work done before the inception date with the new insurer, all the way back to the retroactive date, will be included.
Why the claim may be declined
So why might my claim for Newman’s Widget Consultancy have been declined? Remember that during my first year of trading money was tight and I chose not to buy any PI cover. Under those circumstances, insurers would usually start cover for the new policy from the date the policy starts (referred to as “retroactive date from inception”) – with no cover given for work previously done.
The assumption is that if the business had wanted insurance for the earlier period, they would have bought a policy at the time. Not buying a policy from Day One means the early work is uninsured.
Can this be avoided? The easy way is, of course, to buy cover from when you start trading. But what if you didn’t? It may be that you didn’t know about PI, understand what it was and why you might need it, and so didn’t buy. Is there any remedy?
When you realise that you need a PI policy, you can ask for the policy to cover previous work done. The underwriter will want to be satisfied that you are not buying the policy with an ulterior motive – for example that if, after a few questions, it seems as if a claim may be coming your way.
But if they are satisfied it was really an oversight and (with hindsight) a mistake, you may be offered terms to cover work previously done, with an agreed retroactive date prior to the start date of your new policy – however, you should expect to pay for this. The insurer is taking on additional risk, so this is likely to be reflected in the premium.
So, yes retroactive date is a technical term for the industry, but one it’s important for small business owners to understand. Do you know how far back your PI policy covers you for work done? If the answer’s no, you may want to check your policy with your insurer for peace of mind.