DEFINITION OF ‘BACKDATED LIABILITY INSURANCE’
Liability insurance that provides coverage for a claim that occurred before the insurance policy was purchased. Backdated liability insurance is not an insurance product frequently offered by insurers, since the insurer cannot be certain how much the loss will amount to.
INVESTOPEDIA EXPLAINS ‘BACKDATED LIABILITY INSURANCE’
Companies purchase liability insurance coverage to protect themselves from risks that may arise in the future. In some cases, however, there may be gaps in coverage that are only discovered after a loss event occurs. The company that experiences this loss can either self-insure, meaning that it pays for the loss itself, or can try to purchase a backdated liability insurance policy that will cover the loss.
Insurance companies typically don’t offer backdated coverage because the loss has already occurred. In most cases, the insurer will conduct actuarial analysis on a potential policyholder to determine the likelihood of a claim being made, but in the case of backdated coverage the insurer is already dealing with the loss and instead must determine how severe the loss will ultimately be.
As with most insurance policies, a backdated liability insurance policy will still contain a coverage limit. This protects the insurer from unlimited losses in the case that a claim becomes more expensive than estimated. The insurer will still seek to reduce the claim amount as much as possible, as the less it is forced to pay out the more it keeps in profit. This can be a complicated undertaking because liability claims, such as bodily injury, can be expensive.
Insurers may offer this type of coverage if they determine that the premiums charged will exceed the cost of settling the claim. The insurer will also factor in the investment income that can be earned on the premium. Some liability claims may take a long period of time to settle, which will allow the insurer a longer time period to earn investment income.