Your law firm is closing. You decide to purchase an Extended Reporting Period Endorsement (ERP/Tail) to cover past acts. This endorsement is attached to your last in-force policy. Other than amending the reporting period (for a specified time from 1-year to unlimited), the endorsement does not normally amend any coverage or policy terms. Your incumbent insurer is the only carrier that will issue this endorsement, so there is no shopping for the best premium. ERP premiums run from 1 time to 3.5 times in-force premium and must be paid in full up front. The ERP can be very expensive.
A few malpractice insurers are willing to reduce the liability limits for the ERP Endorsement. This does reduce ERP costs.
Caution on reducing the limits. Once reduced, the law firm has reduced limits for any new matter reported during the ERP reporting period. The claim settles on the new ERP limits. Exposures do not diminish just because the firm is closed. If a past client now brings an action for work done in prior years, the firm will now have per claim ERP limits that might be inadequate.
The problem continues with the aggregate policy limit. At renewal, the aggregate policy limit is replenished. So unless the firm reports multiple claims in any one year, the aggregate limits normally are not a concern. But now there are no more renewals with the ERP in-force. The ERP aggregate limit is not replenished annually. The aggregate limit provides coverage for the terminated policy period plus the ERP extension. If the law firm is hit with multiple claims in the ERP period, these claims may exhaust the aggregate policy limit.
A law firm could save money up front by buying a reduced limit ERP. If the per claim limit is too low, the remainder of the claim is the responsibility of the law firm. And once the aggregate malpractice limit is exhausted the firm no longer has coverage as the obligation of the malpractice insurer is completed.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080