Extended Reporting Period _______________________________________________ By Phyllis Van Wyhe, CPCU, CIC, CSP www.insurancece.com The year following his father’s retirement, Austyn Andrews had two professional liability claims due to his own wrongful acts. The insurance carrier decided to non-renew and Austyn is having difficulty finding replacement coverage. He has asked his agent if there is any way to get an extension of his current coverage. He has heard about an Extended Reporting Provision and wants to know the details. An Extended Reporting Provision in a claims-made policy simply extends the period of time, beyond the expiration of the policy, during which a claim can be made against the insured and reported to the company. In order for coverage to be activated under an Extended Reporting Provision, the following conditions must be present. 1. The wrongful act must have occurred during the time the policy was in force and after the retroactive date. There is no coverage for acts that occur during the Extended Reporting Period. 2. The claim must be first made and reported during the Extended Reporting Period. An Extended Reporting Period applies for only a limited period of time; with most professional liability policies the period runs from 1 to 3 years and cannot be renewed. In almost all cases, the purchase of the Extended Reporting Period does not reinstate limits; the limits remaining from the last policy period will be available during the period extended. Purchasing the Extended Reporting Period offered by the claims-made policy is often referred to as “purchasing the tail.” WHEN THE EXTENDED REPORTING PERIOD IS NECESSARY There are three primary situations when an Extended Reporting Period may be necessary: When the Retroactive Date is Advanced Assume the insured is moving coverage from one insurance company to another and the new carrier will not honor the retro date on the existing policy. The new company is offering a retroactive date that is the same as the inception date of the new policy. In this case, the insured will lose coverage for wrongful acts that occurred between the original retroactive date and the new one. When the Policy is Cancelled or Non-renewed When a claims-made policy is cancelled or non-renewed and the insured does not replace the coverage, there will be no coverage for claims arising from wrongful acts that took place during the term of the policy, but are not reported by the last policy date. If such a claim is not made until after the policy is cancelled or non-renewed, there will be no coverage. When the Insured is Changing from a Claims-Made Policy to an Occurrence Contract There can also be problems when the insured switches from a claims- made policy to an occurrence policy. In this case, there will be no coverage for claims that result from wrongful acts that took place before the inception of the occurrence policy but are not made until the replacement occurrence policy is in force. While the occurrence policy may provide the needed coverage by endorsement, that is rather unusual. COMPARING PROVISIONS OF EXTENDED REPORTING PERIODS The terms of an Extended Reporting Provision are usually specified in the policy at the time the contract is written and can vary significantly from one contract to another. These provisions should be compared when the coverage is placed; they are not negotiated at the time the insured needs to purchase the EPR. In some cases the insurance company may be willing to negotiate some of the provisions of the ERP at the time the policy is written. There are four primary areas to compare Extended Reporting Provisions: 1. The Duration of the ERP The insurance policy will specify the time period during which the ERP will run. Most professional liability contracts offer a one year tail, but occasionally it will be longer. Although it is unusual, some contracts offer a number of ERP options from which the insured can choose at the time the provision is activated. 2. The Price of the ERP The cost of a policy’s ERP may be specified in the policy itself or listed on the declarations page. Generally a one year ERP on a professional liability contract will cost between 75 and 125% of the expiring policy’s annual premium. Some contracts state that the premium will be determined according to the company’s rules and rates at the time of purchase; this type of provision is not to the insured’s advantage. 3. The Right To Purchase Some ERPs are referred to as “One-Way Tails” because they can only be purchased if the insurance company cancels the policy for other than non- payment of premium. By contrast, a “Two-Way Tail” can be activated if the insurer cancels, but is also available if the insured decides to cancel or non-renew the policy. The type of tail that is offered can vary from one company to another and also by line of business. The insured should always strive to find policy with a two-way tail because it offers the maximum number of options. 4. The Time Allowed To Purchase Purchase of an ERP is only available for a very limited period of time. Some policies stipulate that the insured must activate the ERP by the date the policy terminates. Other contracts grant as much as 60 days to notify the company. The most common is a 10 to 30 day purchase window. The insured should expect to pay the premium, in full, at the time the ERP is activated or shortly thereafter. A BASIC ERP (A SHORT TAIL) Some policies extend a limited ERP at no charge. The coverage provided is similar to that provided by the ERP that is purchased under the contract. The Basic ERP is limited, usually to 30 or 60 days, and is provided at no charge. Occasionally the “short tail” will be written on a one-way basis even though the tail that can be purchased under the policy is a two-way tail. A short tail provides a limited Extended Reporting Period for the insured who is not going to buy the full tail. RUNOFF PROVISIONS Some professional liability contracts offer special consideration to the professional who is retiring or will no longer be offering professional services. These companies offer a Runoff Provision rather than an ERP. The runoff provisions permit the insured to report claims for a specified length of time in the future. In some cases these provisions are written on an annually renewable basis with a decreasing premium. Other provisions are offered with a lump sum premium and allow reporting of claims for an unlimited number of years after the purchase. THE ALTERNATIVES Extended Reporting Provisions are policy provisions that extend the time during which a claim can be reported under a claims-made policy. There are definitely occasions when they are valuable to the insured, but at other times there are alternatives. The insured will not need an ERP if the replacement claims-made policy provides full prior acts coverage. Under this policy, you will remember, there would be no retroactive date and it does not matter when the incident occurred. Also, if the insured is moving coverage from a claims-made policy to an occurrence policy, and the new policy will provide coverage for prior acts under what is called a “nose endorsement,” that endorsement will provide coverage for incidents that occurred before the inception of the policy. This article is excerpted from the book Professional Liability: An Emerging Line, written by Phyllis Van Wyhe, CPCU, CIC.
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