A little discussed issue is the remaining Extended Reporting Period (ERP or Tail) aggregate policy limit. An ERP is attached to the last inforce policy. The ERP does not change the terms of the policy or reinstate policy liability limits used during policy term.
A little claims-made insurance background
Attorney Malpractice policies have a per claim policy limit and an aggregate policy limit. As an example, the limits are stated as $1,000,000/$2,000,000. This translates into $1,000,000 per claim and $2,000,000 in the aggregate for the policy term. In this example, for each individual claim there is $1,000,000 to pay the reported claim. The aggregate limit means that the insurer is only obligated to pay up to $2,000,000 for all claims that have been reported during the policy term. Every claim reported reduces the aggregate policy limit. Once the reported claims paid out exceed the aggregate limit then the insurer’s obligation to the insured is fulfilled. In the example given this could be two $1,000,000 pay outs or two thousand $1000 pay outs (2000*$1000=$2,000,000).
The Extended Reporting Period Endorsement (ERP)
Continuing with this example, if the entity in question has not had any claims activity during the policy term that the ERP was attached to the full $2,000,000 aggregate liability is available to pay claims. But what if this entity has many claims made against it and reported during the last policy period or during the ERP. Even with an ‘unlimited’ ERP the most the insurer will pay for claims is $2,000,000. After the aggregate limit is exhausted the insurer’s obligations have been fulfilled.
An ERP is purchased when entities dissolve or maybe the reason that the entity needs an ERP is because of previous claims reported to the insurer. If the insurer is non-renewing the malpractice insurance policy because of a claims issue, then sometimes purchasing the ERP is the wrong decision.
Now assume that the insured has reported 3 claims during the last policy period. The insurer paid out $600,000 on the 1st claim, $650,000 on the 2nd claim, and $700,000 on the 3rd claim. So for these 3 claims the insurer has paid in the aggregate $1,950,000 (600,000+650,000+700,000=$1,950,000) during the policy period. If the insured goes forward with purchasing the ERP there is only $50,000 (2,000,000-1,950,000=$50,000) left from the aggregate policy limit future claims. In this example, the ERP premium may exceed the remaining limit available on the policy.
As with the ship sailing into the sunset, the ERP value vanishes into the burning sun as claims are reported and paid.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080