NGA: Is A Retroactive Date Extension Worth It?

How Your Retroactive Date Affects Coverage

Coverage under the National Guardianship Association (NGA) sponsored errors and omissions ("E&O") insurance policy is triggered by the reporting of a claim or potential claim within the policy period. However, the act, error or omission which gave rise to the claim must have occurred on or after the retroactive date of coverage. Normally, the retroactive date is set as the date from which you have had continuous, uninterrupted claims made coverage.

Typically, once a retroactive date is set it may not be changed as the policy renews year after year. The reasoning behind the industry-wide reluctance of underwriters to insure prior coverage gaps is the perceived moral hazard of allowing insureds to delay purchasing coverage for years until such time as the need for insurance becomes pressing and apparent. Insurers would thus become subject to adverse selection which can significantly skew the actuarial projections underwriters rely upon to maintain financially sound and sustainable insurance programs. In addition, underwriters generally consider professionals who neglect to secure appropriate insurance coverages as lacking in judgment and an appropriate sense of professional responsibility, making such practitioners less desirable as potential insureds.

However, the Lloyd's underwriters supporting the NGA professional liability insurance program have recognized that E&O insurance for professional fiduciaries has not been readily available in the market place. Thus, a fiduciary's failure to secure such coverage is likely not to have resulted from any kind of moral hazard or lack of professional responsibility on the part of the fiduciary, but simply from a dearth of suitable coverage options.

Based on this rationale, the specially negotiated terms of the NGA sponsored insurance program afford members the one-time opportunity to push back the retroactive date to an earlier period thus greatly expanding the scope of coverage. However, this option is only available to policyholders at the time of their first renewal.

Step Rate Increases vs. the One-time Retro Extension Debit

Because the exposure under a claims made policy is constantly expanding, underwriters assess step rate charges at the time of the first several policy renewals until the policy is deemed to have reached maturity. Once a policy is mature the premium rates level off, assuming all else being equal. These step rate factors can increase the of cost of coverage by as little as 25% to as much as 400% over the period of policy maturation. The factors applicable under the NGA program are at the very lowest end of this range.

As noted above, under this program NGA members have the option of extending their retroactive date back to an earlier time frame. Underwriters apply a one-time retro extension debit for this coverage expansion. This charge applies in addition to the normally applicable step rate.

Consider, for example, the case of the AAA Agency which was established in 1994 by Alice Ann Assured. AAA operated through 1999 without any professional liability insurance. In 2000 AAA purchased its first E&O policy and was assigned a January 1, 2000 retroactive date. AAA would thus be covered for claims arising out of any work performed during or after 2000. However, all the work AAA had performed from 1994 through 2000 remained uncovered.

Alice was delighted to learn that under the NGA program at the time of her first policy renewal she would have the option of extending the retroactive date of her coverage back to when AAA was first formed. Working with her broker at Dominion Insurance, Alice developed the tables below to better inform her decision.

As a result of studying this information she made the following key observations:

1. Since she had not taken on her first on client until January 1995, it wasn't really necessary to extend the policy all the way back to 1994. By taking a 5-year instead of a 6-year extension she would save 5% off the one-time extension debit.
2. She also noted that if she had purchased insurance for 1995 through 2000, based on existing rates, she would have paid $6,900 in premiums over that time period while the incremental debit for extending the retroactive date back to 1995 was only $600.
3. While taking the extension did accelerate application of the step rates up to the mature level, the cost differential paid over the four year period which would have been required to reach policy maturity amounted only to $100.
4. Thus the total cost of the extension spread over a period of four years would be $700.

In light of these considerations, Alice concluded that the extension was well worth the cost, considering the peace of mind she'd have knowing that all her prior acts were covered. She also took heart in the fact that the extension debit was a fraction of what it would have cost to have maintained coverage through the entire previously uninsured period.

How to Apply for the Extension

Having concluded that the retroactive date extension was definitely worth the additional cost, Alice simply included a request for the Retroactive Date Extension and the date to extend coverage to with her first year renewal application. As a result, Alice's renewal terms from Lloyd's that year were based on the extended retroactive date and did include the one-time extension debit. Following Alice's instructions, Dominion bound coverage with the new retroactive date.

AAA has maintained continuous E&O coverage ever since then. The premium for her policies in subsequent years fell back to the normal mature policy rate. Alice has not regretted her decision.