When selling, merging, or closing your agency, you should consider the status of your E&O insurance and how you will address liabilities arising from services that you and your agents provided over the years. An Extended Reporting Period may be critical because claims can emerge after the policy has ended.
Professional liability insurance is written on a “claims-made and reported basis.” This means that a claim must be made against the policyholder and reported to the insurer during the period required by the policy. After the policy terminates or is canceled, a later claim generally will not be covered unless an ERP applies. An ERP extends the time for reporting claims made during the ERP, provided they arise from a wrongful act that occurred during the policy term.
ERPs come in several forms, and the appropriate option depends on your firm's circumstances. The sections below explain each available option, when it may apply, and the steps required to obtain it.
Automatic ERP
Your current policy includes an automatic extended reporting period. If the policy is canceled or non-renewed and coverage is not replaced, the Insurer will provide an automatic, non-cancelable extended reporting period starting at the termination of the policy term. The customary length of an Automatic ERP is 60 days, but some policies vary, so check your policy to verify the duration of coverage.
Optional ERP
If your agency will no longer be operating, or will be operating under different ownership, you should strongly consider purchasing an Optional ERP which will provide an additional period of time during which coverage will apply to claims made under the E&O policy that would otherwise be covered under the policy.
An optional ERP can normally be purchased for one, two, or three years. Its cost is calculated using the current premium and the number of years purchased. The first 60 days of the optional ERP run concurrently with the first 60 days of the automatic ERP. To purchase the optional ERP, you must notify the insurer in writing of your election and pay the full premium within 60 days after the policy term ends.
Why you might need this coverage
When an agency ceases operations, the liabilities resulting from years of operation do not go away. Claims can and do arise resulting from sales transactions or services provided from years ago. There are plenty of examples of buyers that decide to add a garage or an extension years after they have closed on a home, only to find out they are not able to improve their home because of a nondisclosed HOA restriction.
While you, the agency principal, may weigh the risk of not purchasing an Extended Reporting Period, the agents that worked for your agency would be left with no E&O coverage if they were named in a suit resulting from a sales transaction that occurred while working on behalf of your agency.
Retirement ERP
If an agency principal retires at age 65 or over, dissolves the agency, and has been insured continuously with the same insurer for at least 5 years, a Retirement ERP will be provided at no additional cost. If the principal is below age 65, a Retirement ERP is available for an additional premium. The ERP must be requested in writing, and any additional premium must be paid within 60 days of retirement.
Death or Disability ERP
The E&O policy provides for an ERP if the agency principal dies or becomes permanently disabled and the agency is dissolved. This ERP is provided at no cost. The agency principal or the principal's estate must request the ERP and provide written evidence of the death or permanent disability within 90 days of the event. Because the policy may impose a different notice deadline in relation to the policy's expiration date, review the applicable policy to confirm all required timing and documentation.
Why you might need this coverage
If a firm can no longer provide services because the principal dies or becomes disabled during the policy term, this ERP comes at no cost. If the policyholder's estate, heir, executor, or administrator provides notice of an insured's death within 60 days of the policy's expiration date, an ERP is provided so that the estate can be closed while coverage is provided for services performed prior to the insured's death.
Conclusion
Firms need to recognize the importance of extended reporting periods. Professional liability exposures may exist long after the expiration of a policy period since the claim may not be made for several years after services were performed. This exposure, often referred to as “tail exposure,” requires coverage that provides protection during this extended period. “Tail coverage” is not commercially available as a stand-alone insurance product. As a rule, an ERP is only available following the coverage of a previously issued claims-made policy, and the decision to purchase the ERP must be made during the period allowed by the policy. An ERP cannot exist during the policy's period of coverage.
Note that there is no right to any ERP if the insurer cancels or refuses to renew the policy due to non-payment of amounts due, non-compliance with any terms of the policy, or any misrepresentation or omission in the application for insurance. The ERP also never covers any services performed after the termination of the policy term.
Ownership transition can be a difficult time with an unlimited list of issues to work through. Having a better understanding of your professional liability policy and how an ERP may work will only serve to simplify your needs and address your insurance solutions.
ERP terms, eligibility requirements, deadlines, and costs vary by policy and insurer. Review the applicable policy and consult your insurance professional before making a coverage decision.
