If your law firm recently had its professional liability insurance canceled and is unable to secure a new policy with full prior acts coverage, you may be asking yourself, "What can I do?"
Many law firms faced with the prospect of the above scenario will be looking closely at the possibility of purchasing Extended Reporting Period coverage, otherwise known as an ERP. This evaluation is most prominent when a firm is canceled due to claims and cannot secure full prior acts coverage in the open market. Once an ERP is purchased, it allows the firm to evaluate the market without the need for prior acts coverage, making them a more desirable risk.
An ERP, which is also commonly referred to as a "tail" policy, gives the insured a right to report claims after a policy has expired or been cancelled. An ERP policy also may be a consideration if a firm dissolves or is acquired or merged with another firm.
In today's market, ERPs are typically purchased when the insured is canceled by its current carrier and does not purchase a new policy that will continue to insure the past acts of the firm and/or its predecessors. For example, if a firm dissolves, former lawyers of the now dissolved firm face the possibility of being sued for malpractice for years after the firm disbands -- even if the attorneys join new firms or practices. In most cases, when attorneys join new firms, they are provided no prior acts coverage for their past services unless this has been negotiated and is provided by their new firm's carrier. Although lawyer professional liability policies are claims-made policies, they normally only provide coverage for services rendered on behalf of the "named insured" or its predecessors and not for former firms not associated with the "named insured."
ERP policies are designed to provide attorneys with the necessary liability protection should a malpractice law suit be filed against them, even if they are unable to secure prior acts coverage with their new firm, or if they retire and therefore have not purchased a new policy. In layman's terms, ERP policies provide coverage to report any claims that may be filed against attorneys for their past services once the policy has expired or has been canceled and for a specific period of time. An ERP does not, however, increase or reinstate the existing or canceled policy's limit of liability; rather it is subject to the available remaining limits at the time it was purchased.
The duration of most policy forms ranges from 12 to 60 months, with pricing between 100 percent of the annual premium for a 12-month ERP to 250 percent for a 60-month ERP. In addition, some policy forms provide an unlimited ERP, allowing the insured to report claims that are filed against it indefinitely. This provision is very attractive for firms with unlimited statute exposure, such as estate planning firms. When researching ERP policies, it should be noted that some policies indicate that the price is determined in accordance with the insurer's rules and rates, which are in effect at the time the ERP is purchased. This type of policy clearly leaves the insured at the insurer's mercy, and therefore is the least advantageous.
Some policies also provide a free unlimited tail for an individual of the "named insured" in the event he or she retires during the policy period, or in the event of death or disability. Most policies require, however, that to qualify for this benefit the individual be insured continuously by the insurance company for a period of time, typically five years.
Most policy forms provide the insured with the ability to purchase a tail in one of two ways. The first, which is known as a Two-Way Tail, allows the "named insured" to purchase a tail if the insurer or the "named insured" refuses to renew the policy. The other, a One-Way Tail, allows the insured to purchase a tail only in the event that cancellation or non-renewal is initiated by the insurer. A Two-Way Tail is considered to be more favorable due to its bilateral nature.
In addition, most policies allow an insured to purchase an ERP up to 30 days following non-renewal, expiration or cancellation of the policy. Other insurance carriers may require the insured to make the decision on or before the last day of the policy or within 10 days of that date. If a decision must be made before the end of the policy period, do not delay. Many carriers will not honor the ERP option if not exercised timely.
ERP provisions are often overlooked by law firms when securing professional liability insurance. Unfortunately, when you need to exercise an ERP due to the aforementioned examples, there is little room for negotiation. Therefore, take the time to review the ERP provision in your policy and consult with your insurance broker to determine how your firm will be impacted in the event you wish to secure one.
Ahern, RPLU, is president of Ahern Insurance Brokerage, an independently owned insurance brokerage firm specializing in professional liability insurance for the legal community. He can be contacted by e-mail at firstname.lastname@example.org.