Dwain Clifford | The Policyholder Report | October 20, 2016
Most professional-liability policies are written on a “claims-made” basis, which provides coverage for lawsuits filed against the insured during the policy period — even for damages caused by some professional negligence that occurred long before the policy was issued (and, perhaps, for some mistake at a time when the insured had no insurance coverage at all).
But as the insured recently learned in Sunshine v. General Star Nat’l Insurance Co., yawning gaps can open up in insurance coverage that was otherwise dutifully purchased year after year through the often-misunderstood, and often-overlooked, mischief wrought by the policies’ “retroactive date.”
In Sunshine, Sunland Appraisal was a “real estate appraisal service” that purchased its one-year professional-liability policies every year, which Sunland apparently believed provided seamless coverage from year to year. In December 2008, while one of these policies was in force, Sunland had appraised a property for a homeowner. After the homeowner defaulted on a loan several years later, the mortgage company sued Sunland in November 2013 for alleged inaccuracies in the appraisal. The mortgage company won.
Which policy pays?
Neither one. Both policies had a “retroactive date” provision, which protects insurers from having to pay claims for damages arising out of a negligent act before that date. For the 2008 policy, this date was February 24, 2006. And for the mortgage company’s claim, this date stretches back far enough, but claims-made policies provide coverage for lawsuits filed during the policy period. Because the lawsuit wasn’t filed until November 2013, the first insurer escapes.
For the 2013 policy, the retroactive date was May 24, 2010. This policy would normally cover the lawsuit filed in November 2013, but the retroactive date stretched back only to 2010, two years after the bungled appraisal in 2008. Because the negligent act occurred before the retroactive date, the second insurer escapes and the insured is bare of any coverage at all.
Sunland had sued both insurers, arguing that, unless one of the insurers stepped up to pay, the insured’s coverage had surely been “illusory” all along. This argument lost. After all, if the mistake from 2008 had discovered been right away, and the lawsuit filed that year, the first insurer would have been on the hook. This possibility of limited coverage was enough to leave Sunland with years of premium payments and a claim falling straight through a gap opened by the retroactive dates.
This pinch can be especially keen when an insured moves its coverage to another insurer because many insurers will write coverage with a retroactive date set for the same time that the insurer begins its new relationship with that insured. For an initial year of coverage under these terms, the bad act, the resulting harm, and the lawsuit would all have to happen in a single year to trigger coverage. To put it mildly, that just isn’t worth much, but it’s also a fine point about coverage that a reasonable insured could miss.
The safest practice to avoid a gap like Sunland fell through is to purchase policies without any retroactive date, or at least a date far enough in the past that potential claims would be barred by a statute of ultimate repose. This may be expensive, but the three-year “window” of coverage in Sunland’s policy illustrates how easily an insured can be bare of coverage even though policies have been renewed every year on time.