Professional Liability Insurance can address professional negligence claims. For example, it can step in when a client alleges your business…

  • Failed to complete a project.
  • Made mistakes in its work.
  • Gave poor advice.
  • Breached a contract.
  • Fell short of professional standards.

If it's a claim over financial losses your work caused, it's usually a job for this policy. That’s easy enough. But to receive your Professional Liability coverage benefits, the timing of the claim is everything.

Claims-Made Policies and the Professional Liability Sweet Spot

Nearly every Professional Liability policy is a claims-made policy. That means the policy must be active when the alleged incident occurs and when the claim is filed in order for a claim to be covered.

Let’s say you’re a freelancer with Professional Liability coverage. You contract with a client, complete the project, and go on your merry way. Later, you decide that you don’t want your insurance, so you cancel the policy.

But what happens when that same client claims you made a mistake that cost them money? Even though you were covered when the alleged mistake happened, your insurance provider won't pay because your Professional Liability policy is no longer active.

If that’s not clear, check out this chart:

The solid line represents the policy term – let’s call that the “sweet spot.”  The dotted lines show when the policy is not active. Take a look at Incident A and the corresponding Claim A. Both occur on the solid line (i.e., during the policy term) so Claim A is covered.

Now look at Incident B and its claim. Incident B happens occurs during the policy term, but Claim B is not in the sweet spot. It’s outside of the policy term, on the dotted line, so Claim B is not covered.

Mind the Gaps with Retroactive Dates and Tail Coverage

At first glance, that claims-made business doesn't seem too tricky. Just keep your Professional Liability policy active and you're set. Right?

Not so fast. If you did work before your policy started, you could have a potential coverage gap. That's why you also need to be aware of your policy's retroactive date. The retroactive date is the earliest point that an incident may occur and still be covered.

So let’s say your policy goes into effect on January 1, 2017, but has a retroactive date of January 1, 2016. An incident in 2016 is covered as long as the claim is made during the policy term.

Again, this chart illustrates that point:

Prevent gaps in coverage by mainting your retroactive date when you renew or cahnge carriers.

Incident C occurred before the policy began, but because it falls within the retroactive date and the claim was made during the policy term, Claim C is covered. Not every E&O policy has a retroactive date, so ask your agent if your policy has one. Now let's talk about life after your policy. Unfortunately, small-business owners sometimes drop their insurance because they…

  • Think it's too expensive.
  • Decide to change carriers.
  • Close their business.
  • Retire.
  • Forget their renewal date.

That's when the trouble starts. Remember, your policy needs to be active to cover claims (including those brought by clients you might have served years ago). To stay covered after your policy is no longer active, you may want to consider tail coverage (also called "extended reporting period provisions"). Basically, a Professional Liability policy with tail coverage can cover claims made after the policy expires or is cancelled.

Incidents that happen during your tail coverage period usually aren't covered by your policy.

To illustrate that point, let’s look again at our trusty chart:


Incident D occurs during the policy term, but its corresponding claim occurs after the term. With tail coverage, Claim D can be covered.

Now that you have an idea of how your coverage works, let’s make sure you know how to use it. Next up: how to file professional liability claims.