“Tail Coverage” – Understanding the Extended Reporting Period

Professional liability policies, almost always written on a claims-made basis, typically contain a number of options for the insured to obtain an Extended Reporting Period (ERP). What does that mean? And why might it be necessary, or at least a good idea? While many variations on the ERP exist, the basic purpose, function and operation of the ERP are fairly standard. Here’s what you should know.  

The ERP, also known as “tail coverage,” provides for an additional period of time during which the insured can report a claim after its claims-made policy has expired. That’s important, because the policy itself typically provides that the claim must be first made against the insured, and reported to the insurer, during the policy period. Tail coverage typically isn’t necessary if the insured is renewing its coverage, but it can be invaluable where that’s not the case. 

• Some policies provide a limited “automatic” ERP to allow the insured a grace period, usually 30 to 60 days, to report a claim that was made during the policy period. This typically costs the insured nothing. 
• If an insured’s policy is cancelled or non-renewed by the insurer, or the insured elects to cease carrying professional liability coverage, an “optional” ERP is available at an additional cost to the insured. The cost is usually based on a multiple of the premium on the cancelled or expiring policy. Such tail coverage is typically purchased in one-year increments, up to five years, and sometimes longer – but as the tail grows, the cost goes up, since the insurer is taking on additional risk.
• Typically, the only instance in which an ERP will not be offered is where the policy has been cancelled for cause – nonpayment of premium, fraud or material misrepresentation.
• Some ERPs extend the time during which a claim that was first made during the policy period can be reported. Other ERPs allow for the extension of coverage where the claim was both first made against the insured and reported to the insurer during the ERP, as long as the wrongful act giving rise to the claim took place after the retroactive date and prior to the end of the original policy period. 
• The ERP does not extend the policy period, and does not change the scope of coverage or increase the policy’s available limits.
• A common reason to obtain tail coverage is where an insured is winding up its business – due to retirement, sale or unprofitability, for example. While there’s no need to maintain professional liability coverage on a shuttered business, the insured will want to maintain some protection against wrongful acts it may have committed prior to the policy’s expiration, but a claim has not arisen and thus cannot be reported until after the policy has expired.
• An ERP is always optional, and an insured is never required to purchase one. However, the ERP provides a great deal of additional protection and should be seriously considered, especially if the insured foresees a major change to its business or its insurance program.

Click here to download the full PDF.

 

Bulletin provided by Phelps Dunbar, LLP. Disclaimer: the information contained in this bulletin is for general guidance and educational purposes only and does not constitute legal advice. Discussion of insurance policy language is descriptive only; every policy has different language and is subject to different terms and conditions. Please refer to your own policy for its specific language.