Extended Reporting Policy (Tail Policy)

This is why it is worth investigating the availability of an ERP that is longer than the three years that is built into many polices when the time comes to wind down or sell your practice. 

Professional liability policies are issued on a claims-made basis.  So, if a professional liability policy is cancelled or not renewed, any claim that is reported or is made after the policy lapses is not covered.

If you sell your company to another firm it is usually structured as an asset purchase. This is like selling a car. The buyer is not responsible for any accident that might have occurred before the sale and the seller remains responsible for this. 

A claim against a professional service firm can occur years after the work is performed. The statute of limitations and the statue of repose work together to ultimately end the design professional’s exposure to the liability for past work. However, this is often 10 years or more after the work is completed and the project constructed. The statute of limitations is the time frame for making a claim after the defect or damages are discovered. The statue of repose is the time frame for making a claim after the construction is completed and the project is usable. Here is a link to these time frames in all 50 states. Note the statute of repose varies from 4 to 15 years and is 10 years in 26 of states.  

Professional liability is personal liability. The design professional that stamped the work is legally personally liable for the work even if the company that performed the work is out of business and has been liquidated.

For firms that are dissolving or selling their practice the best solution is to purchase an Extended Reporting Period endorsement or Tail Policy. The Tail Policy does not extend the policy period, but instead extends the time for the professional to report a claim or incident to the insurance company for work performed before the policy expired. 

Tail Insurance will continue to cover any E&O claims after the E&O policy has expired. Tail coverage or extended reporting coverage (ERP) is a feature of an Errors & Omissions policy, meaning is often built-in to the E&O policy as one of its provisions. 

However, these built-in ERP provisions are often options for 1 to 3 years of extended reporting. Five- or ten-year extended reporting periods are sometimes not even commercially available. If they are available, they need to be negotiated and purchased just before the firm winds up its practice.

As such, it is important not to enter professional service contracts that obligate you to maintain E&O insurance for more than three years. Many clients will ask you to sign contracts that require E&O insurance to be in place for 5-10 years after the date of completion. This may not be possible if you wind down or sell your practice. 

What are the costs of an ERP?

The cost is generally a multiple of the last annual policy premium and depends upon the length of time selected for the extended reporting period.

Each carrier rates their ERP’s differently. Your policy should spell out the costs. Below is an example

· 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

What should I be aware of when purchasing an ERP?

ERP’s must be paid in full at the time of purchase and the policies limits will no longer refresh each year.  For example, an architect purchases a 3 year ERP and, at the time of purchase, the architect has limits of 1 million per claim and 1 million aggregate. In year 1 of the 3 year ERP a claim is made and a $1,000,000 pay out is made.  Even though the client has purchased 3 years worth of coverage their limits will be exhausted and if another claim is made the architect will not be protected.

The Extended Reporting Period is not a perfect solution. The reporting period will often end before the statue of repose has run its course. The good news is that most claims are made within three years of a projects completion. However, I have seen at least one case where a latent defect was not even discovered until five years after the policy was completed.

This is why it is worth investigating the availability of an ERP that is longer than the three years that is built into many polices when the time comes to wind down or sell your practice.