Wouldn’t it be amazing if we could go back in time and rectify our past? It would save us from unprecedented misery and brighten up our future. Many a times mistakes done in the past unknowingly come to haunt us in our present and future. Such situations may has grave consequences especially for professionals and businesses, any blunder done unintentionally in the yesterday years may prove fatal for the future operations and balance sheet of the business. In the past, liability insurance offered coverage for the incidents happened and covered during the term of the policy only. So any claims raised in present for the work done in the past would mean heavy losses and sometimes closure for the business. So, is there a way a business can protect itself from risks that may arise from past events? The answer lies in the retroactive clause of the liability insurance.
A retroactive clause in simple terms means indemnity coverage against claims arising from work that was done before the policy commenced. A retroactive clause in a liability policy includes a retroactive date. The mention of retroactive date in the policy schedule covers for incidents which have happened in the past before the start of the policy. A inclusion of retroactive clause is necessary in liability insurance as it can take months and years for the problem to surface in a job done by a professional or business for which they may be held liable for claims. This applies especially in the case of professions like doctors, architects, engineers who are prone to complications for their work done years ago when they didn’t had valid liability insurance to cover themselves. For example - Deterioration in the health of patient due to complications directly arising from a surgery done months back, major leak and damage in a property due to faulty pipeline work etc. are some of the cases that take time to crop up and the client may sue you or your business and make hefty claims.
The IRDAI (Insurance Regulatory and Development Authority) in India has laid down some important conditions regarding the retroactive coverage clause for the Insured and Insurance companies.
1. There should be no gap or break during the insurance periods.
2. The applicant/insured should disclose all the reported losses and risks to the insurance company for the last 5 years before the inception of the liability policy.
3. The insurance company will assess and agree to the risks associated before offer offering coverage to the insured
4. The applicant/insured should disclose the claims made since the retroactive date.
5. The retroactive coverage offered should be limited and restricted in the retroactive clause.
6. At no time the retroactive coverage should exceed the policy coverage during the relevant policy period.
A retroactive clause is one of the most practical and significant inclusions in the liability policy’s coverage. It amplifies the value of the liability insurance for businesses and professionals by many folds. It further inculcates the necessity of having a liability insurance policy for all businesses at all times since the inception of operations.