If you've decided to purchase professional liability insurance, you know the value of protecting your business against claims of professional negligence. But it's also critically important to understand the reasons why, as long as you're in business, you should never let your policy lapse.

Claims Made Vs. Occurrence Insurance Policies
Also known as errors and omissions insurance or E&O insurance, professional liability coverage comes into play when and if a client should allege that you or someone you employ made an error or omission in the course of doing your job, causing the client a financial loss. In such cases, E&O claims insurance would pay for your legal defense as well as any settlement the court orders you to pay as compensation to your client, for any covered claims up to the limits specified by your policy.

Professional liability policies are nearly always written on a claims-made basis rather than an occurrence basis. What this means is that coverage depends on two factors: when the alleged omission or error occurred, and when the lawsuit is brought.

Retroactive Date of Inception
The most important dates to keep in mind are your policy's termination date and its retroactive date of inception. What is a retroactive date of inception? Also called a "prior acts coverage date," your retroactive coverage date (a.k.a. retro date) establishes exactly when your coverage begins. In most cases, this date will be the date you first bought your policy. Some comprehensive E&O insurance plans also offer prior acts coverage, in which cases your retro date may be a date prior to your policy purchase.

For a claim to be covered, the alleged error or omission must be covered by the policy and must have taken place on or after the retroactive date of coverage, but before the policy's expiration date; and the claim must be made while the policy is still in force. The claim must also be reported to the insurance carrier within the time frame stipulated by the policy.

So, let's say you bought your errors & omissions coverage June 1, 2008, and that's your retroactive date of inception. Any claims related to errors and omissions you may have made prior to that date aren't covered. Your policy's termination date was May 31, 2009, but you renewed it to maintain continuous coverage. Your renewal date was June 1, 2009, so your new termination date is May 31, 2010 – but your retroactive date of inception is still June 1, 2008. Any covered claims related to work between June 1, 2008, and May 31, 2010, would be covered – as long as they are made and reported to your carrier while your policy is still in force.

But what happens if you choose not to renew your E&O policy? Let's say a client hires you to do a project, but stipulates in the contract that you must purchase E&O insurance for your business. When the contract job is complete, you let the insurance policy lapse because you think it's no longer needed. Months later, your client slaps you with a lawsuit alleging that it was able to trace the cause of a financial loss back to a mistake you made while working on the project. Because your E&O insurance policy is no longer in force, you have no coverage for that lawsuit – even though the policy was active when the error was made.

Regardless of what your retroactive coverage date is, if you let your claims-made policy lapse, your coverage for prior acts is gone. You could lose coverage for years of work. Coverage starts all over again, with a new retro date, on the day your policy is reinstated.

Tail Coverage
Does this mean that you'll need to pay premiums to continue your professional liability policy indefinitely, even if you retire or decide to close your business?

In such cases, you can purchase coverage for an extended reporting period beyond your policy's expiration date, allowing continuous coverage for any claims that may be brought after your business has ceased. This extension, known as "tail coverage," typically lasts from one to five years.

Tail coverage only includes claims related to errors and omissions that took place after your retroactive coverage date of inception and while your business was operational; it doesn't cover claims related to work you may do after your business has closed.

Costs for tail insurance coverage vary, as can the amount of time coverage is extended, so ask your agent or broker for details.