Retro dates: Why start-up companies need E&O policies
by Francine Armel, Senior Vice-President & Chief Underwriting Officer
Companies in the research and development phase have relatively low insurance exposures, primarily property and general liability exposures. Before their product is tested and the company has contracted with a manufacturer, or before the product is on the market, it does not seem they would need errors and omissions coverage (E&O). However, companies in the R & D phase may want to prepare for risks to which they will be exposed down the line by purchasing E&O coverage in this early phase.
But why would a company get insurance coverage before they need it? It has to do with retroactive dates.
E&O policies are typically claims made or claims made and reported policies, meaning the claim must occur during the policy period. If it is a claims made and reported policy, the claim must also be reported during the policy period. Generally speaking, in any kind of E&O policy, the retroactive (retro) date is the date after which coverage for certain acts will be covered. There’s an exclusion in E&O policies for acts undertaken by insureds before the retro date.
So, if a company has a policy with a retro date of September 5, 2015, the policy will cover claims made during the policy period in respect of acts alleged to have been committed from September 5, 2015 going forward. If the allegations in the claim were made in respect of acts that took place prior to the retro date of September 5, 2015, the retro date exclusion would preclude coverage for such acts.
It may not be immediately apparent why this matters—after all, how can a company have E&O exposures if they do not have a product to sell yet? But in some cases, once a product is brought to market, companies are involved in claims that implicate the R&D phase of product development.
For example, a company develops a medical device and markets and sells it on the strength of their research. Unfortunately, that device causes harm to a patient who alleges that not only is the device faulty, but the research supporting it is suspect. Though the company would be covered for the portion of the claim related to the alleged faults in the product, the retro date on their E&O policy would preclude them from coverage for the portion of the claim related to research prior to the inception of the E & O policy retro date.
The best way to prevent this costly problem in the future is for R&D companies to buy E&O insurance during the R & D phase. That establishes a retro date covering them for future claims related to R&D. If the company ever has to purchase a different E&O policy, they may still be protected, as insurers will generally honor the retro date of the first time they bought insurance, even if it is with another insurer.
As R&D phase companies grow and their insurance needs grow with them, buying certain coverages early prepares them for conducting clinical trials or selling their product. Yet a company in the R&D phase, does not have huge financial resources. Still, if these companies are developing a product that could lead to future E & O exposures, it’s worth considering purchasing E&O coverage during R&D. The premiums are often low, and it establishes a retro date that may protect the company decades into the future. If it fits with their budget, buying E&O coverage during the R&D phase should be considered.