Below you can learn more about Extended Reporting and Tail Coverage and how it might apply to you. In this interview with one of our Professional Liability Brokers,Dylan Kelly explains ERP and how it relates to your professional liability coverage.
Also, for more information about coverage during Mergers & Acquisitions, click here: Managing Insurance Coverage During Mergers and Acquisitions
Drew Smith: Good Morning Dylan.
Dylan Kelly: I’m doing great, how about you?
Drew: Great, thanks. So what can you tell us about your position at Axis Insurance Services, LLC?
Dylan: Sure. I’m currently a Professional Liability Broker after spending time as an account manager. I’ve worked for Axis for about… 4-5 years now.
Drew: And you’ve learned a lot about professional and management liability. One item that seems to come up frequently with these types of coverage you sell is tail polices or extended reporting. So what exactly is a tail policy or an ERP?
Dylan: In order to understand what an ERP is, you first have to understand how claims-made coverage works. A claims-made policy only covers claims that are made, and in most cases, reported during the policy period. When you cancel this policy, no claims will be covered after the termination date even if the policy was in place when the action giving rise to the claim occurred. Almost all E&O, D&O, EPLI, and Cyber policies are written on a claims-made basis.
An ERP or Extended Reporting Period is a runoff period that allows the insured to report claims after a claims-made policy expires and is usually available for an additional premium. These options are typically built into the policy form itself and their duration varies anywhere from 1-10 years. You can easily check your own policies optional extended reporting period options by looking towards the end of the policy form and reviewing the endorsements.
In addition to the optional ERP’s that are already built into the form, there is another way to purchase an ERP. This alternative method is what we would call a Standalone ERP, or Tail Policy, and involves having another insurance company write a standalone policy for the just the runoff period or tail period. Its Unusual but it is being used more frequently, given the fluid M&A environment.
Drew: What type of company needs it? When do they need it?
Dylan: Any company that is ceasing their operations or selling their business and has claims made policies such as E&O, D&O, EPLI and Cyber coverage should seriously consider purchasing a tail policy. If a company is being acquired, the chances are high that an ERP is required by the purchasing entity.
Aside from it being a standard requirement, it is a really good idea, especially when you consider that claims often occur from incidents that date back several months or even years from when a company is closed or sold.
Drew: How much does it cost?
Dylan:So, the optional ERP that is built into most E&O policy forms typically goes something like this:
100% of the Premium for a 12-month Extended Reporting Period
150% of the Premium for a 24-month Extended Reporting Period
200% of the Premium for a 36-month Extended Reporting Period
This can vary greatly depending on the carrier, but the figures depicted above are standard.
In regard to a standalone ERP, a better rate than what the insured currently has available through their policy maybe negotiated to include both broader coverages and higher limits. Also, a standalone ERP can offer additional options for 5, 6, and 10 years to satisfy specific contract requirements.
Drew: How long a period should you purchase?
Dylan:This is a really good question. A company may be required to only carry a 1 year ERP, but that doesn’t mean that is the best option. I recommend an ERP of at least 3 years to all insurance agencies, real estate firms, consultants, and other professional service industry professionals upon the sale, or closing of their operations. No matter how tight your procedures are or how much control you have over your operations, you really do not know if some seemingly trivial mistake that was made a few years ago will result in a large claim down the road. It would be a shame to pay for 5+ years, or in some cases +15 years of claims made E&O coverage only to have a claim go uncovered because it was reported after your policy expires.
While I normally recommend at least 3 years, in some cases that is just not enough. Attorneys often purchase tail policies that go forever. Doctors also purchase ERP’s that will not expire. This is due to the nature of these claims and how they can arise from professional mistakes that occurred in some cases, decades ago.
When considering the length of ERP you need, you should also consider your state’s statute of limitations. Some states have a statute of limitation of 1 year, where others have a statute of limitation that spans 15 years for some industries. If your states statute of limitations is 15 years, you may want to consider an ERP that will span longer than that to make sure you are covered down the road.
Drew: What if my carrier doesn’t offer it?
Dylan:This is when a standalone ERP becomes the best option. Some carriers do not offer ERP’s at all, and in this case, you need to contact a Professional Liability Broker about obtaining a standalone ERP.
Below we have a list of our most asked questions about this topic:
My company is being acquired, and my E&O policy only has an option to purchase for a one year policy required to close the sale, what are my options?
You can either request additional options via endorsement from your current carrier, or try obtain a quote for a standalone ERP from a surplus lines market.
My company is being acquired and my E&O policy does have the required options already. However, they are very expensive. Do I need to accept the options already available through my policy?
No, you do not need to accept your current policy’s E&O options if they are too expensive. Sometimes, you can obtain a better rate by getting a quote for an ERP on a standalone basis. This depends primarily on the size and scope of your services. For example, if you are a larger to mid-sized commercial real estate firm or insurance agency, you are more likely to find a better rate on a standalone ERP then if you are a solo practitioner. This is since ERP’s are typically at a minimum premium of anywhere from $10K-$20K depending on the specific carrier.
Is purchasing an ERP just like purchasing a policy extension?
Absolutely not. There is a very important difference that is fundamental to understanding claims made policies. ERP’s do not allow you to report claims that occurred after the effective cancellation date, or before the original retroactive date. ERPS also do not allow for the repeating of “incidents. So all incidents should be reported prior to the policy expiration date.
To illustrate this point, if you are an Insurance Agency and you close your shop with hopes to retire and cancel your policy effective October but then go ahead an accept a deal from a friend or family member in November, and that deal leads. A subsequent claim that the insured will most likely no have coverage. Coverage stops the date the policy is cancelled. The ERP simply allows you more time to report incidences that you are currently unaware but may have already occurred while coverage was still in place.
What information do I need to provide to obtain a standalone ERP?
In most instances, we only need 3 items to obtain a quote. They are as follows:
- A completed E&O Application for the entity for which coverage is proposed.
- 5 year updated E&O loss runs – this is a report you can obtain upon request from your existing carrier that details the claims you have had on your E&O policy for the periods you are insured with that company. If you switch E&O carriers every few years, you will have to be sure to contact each of them dating back to five policy periods ago, and request a loss run report or statement.
- Your current policy declarations page or some other proof of retroactive coverage.