Retroactivity
Liability insurance policies don’t all trigger the same way. This is confusing and can lead to uninsured gaps, even though you’ve taken out cover. We’ve put together this simple explanation.
Different triggers:
Occurrence policy wordings – a claim is triggered if the occurrence (event) that gives rise to liability happens within the policy period. Example: You cause a flood that spreads to your neighbour’s basement, damaging their contents. Simple. If you cause damage in the policy period, subject to policy terms and conditions, your policy will respond.
Claims made policy wording – a claim is triggered when you know a claim is being made against you in the policy period. The occurrence that gives rise to the suit, can, and often has, happened well before the period of insurance. The critical point is that you do not know the occurrence before the start of the policy period. Not so simple. Example: You cause a flood that spreads to your neighbour’s basement. Unbeknownst to you, the water from your property was polluted with a chemical. Your neighbour advises there is no damage to their property; however, some months after the flood, you are visited by a Compliance Officer from the regional council, who takes a statement and follows up by advising that you will be prosecuted under the Resource Management Act. Provided the Compliance Officer’s advice happens in the policy period, and you had no knowledge that a prosecution was a possibility before cover commenced, subject to policy terms and conditions, your policy will respond.
However, with claims-made policies, there’s an important proviso. How far back in time will occurrences be covered under the policy?
This is known as the policy’s retroactive date. Ideally, it should be from the date when the business started trading. So as far back as possible. Sometimes you can arrange cover that is ‘fully retroactive, all known circumstances excluded.’ The critical thing to understand is that when changing insurers or contracts from one to another, the retroactive dates need to match; otherwise, you could be effectively losing cover for historical occurrences.
Retroactivity also elevates the importance of full disclosure at the beginning of a policy period.
If it’s not declared, and you or one of your staff was aware of it or should have been aware of it when your policy application or renewal declaration is signed. The insurer can reject your claim. Having sound systems to prompt disclosure within businesses is vital. Both during the year and at renewal. Sadly, it’s the human tendency to keep things under wraps, hoping they’ll go away or get sorted out. This approach is incompatible with policy obligations.
This may seem nit-picky, and it is; however, for many forms of liability cover, years could pass before you are made aware you’ve made an error or done something that has caused financial loss or injury. And you could be paying for cover that isn’t there. A little attention can avoid a lot of heartaches; if not a severe financial setback.
Your broker will clearly understand policy structures, including occurrence and claims made triggers. When you take out or renew cover, ensure they are clearly explained.
