A legal malpractice policy (AKA Legal Professional Liability policy or LPL policy) covers law firms from malpractice claims. Generally, these are claims-made policies that only respond to claims presented or discovered during their effective period. But what about an old mistake that appears years later?
This is where the retroactive date matters. The retroactive date is the first date a mistake can occur and be covered. Note that the mistake and the claim are treated separately.
What is a Retroactive Date?
The International Risk Management Institute (IRMI) defines a retroactive date as “a provision found in many (although not all) claims-made policies that eliminates coverage for claims produced by wrongful acts that took place prior to a specific date, even if the claim is first made during the policy period.” Click here for cited content.
In short, the firm’s mistake must occur after the retroactive date to be covered. This is true even if there is coverage on the day the claim is presented.
Generally, a firm’s retroactive date is established by the first date they purchased a malpractice policy. Therefore, every attorney or firm should obtain malpractice insurance as soon as possible!
How a Retroactive Date works:
The best way to understand a retroactive date is through example. Here are two examples. One, where the retroactive date is helpful The second shows where the retroactive date leaves a firm without coverage.
Example 1- When the retroactive date helps.
A real estate firm opens on January 1, 2018 and purchases a legal malpractice policy with a retroactive date and effective date for January 1, 2018. Within months, one of the firm’s attorneys fails to properly clear a lien prior to a property’s sale, but no one realizes the mistake. Year after year, the firm replaces its malpractice insurance with other insurance company’s more cost-effective policies. Despite all the changes, the firm maintains the January 1, 2018 retroactive date.
Five years later, the new property owner with the outstanding lien discovers the mistake and sues the prior owner. The prior owner then sues his attorney for malpractice – for failing to properly remove the lien. Even though the firm’s malpractice policy is with another company and the mistake is 5 years old, the company insuring the firm at the time of the suit will respond and defend – because the mistake was made after the January 1, 2018 retroactive date.
The retroactive date provides the firm coverage for old mistakes. It does not matter that the policy is now with another company. What a great result!
Example Two – When retroactive date works against the insured.
The same real estate firm opoens its doors on January 1, 2018. They buy the same insurance policy and make the same lien-clearing mistake. However, in 2020, the moves their insurance policy to another carrier and changes the retroactive date to January 1, 2020 because it is “cheaper”. To them, they want the savings – and they don’t know of any mistakes!
Five years later, the same property owner files the same suit and the prior-owner/client sues for malpractice. This time, the carrier will not cover the 2018 mistake. The claim arose from mistakes that occurred prior to their 2020 retroactive date.
The firm will also not find coverage from the policy in place at the time of mistake. A claims-made policy requires that the claim is presented prior to the expiration date. Here, the policy at the time of the loss had a January 1, 2019 expiration date. The insured must notify the carrier prior to the expiration date to obtain coverage. As such, there would be no coverage under the earlier policy.
Retroactive Date Solutions/Conclusions
Firms should purchase malpractice insurance as soon as possible. Even with minimum limits, the timely-purchased malpractice policy will allow your firm to lock-in their earliest possible retroactive date. In addition to the retroactive date, there are other factors to consider. Click here to learn about other legal malpractice options you should consider.
If you do not have an adequate retroactive date, there are solutions to consider – stay tuned for another blog about that soon!