End of year is always an exciting time for professionals. For Accountants and Lawyers it can be the scariest of times. Many professionals make or execute career decisions at year. Some start out on a new journey as a solo practitioner. Others are forming new partnerships or joining existing partnerships. Whatever the reason, contacting your malpractice insurance agent before all of the decisions are made can help protect your assets and possibly save you money in the long run.
If is extremely important that new claims-made coverage, if needed, start at the inception date of the new entity.
Claims-made coverage continuation issues become very important when a professional leaves or joins a new firm or a firm is dissolved or created.
Claims-made coverage as well as past acts coverage ends at policy termination. Coverage also terminates when a professional leaves a firm. Most malpractice policies continue to cover the past acts of professional even after they left the firm. This is providing the continuous claims-made coverage is maintained.
Professional liability policies are generally written on behalf of the named insured firm. Coverage extends from the firm to the employees and partners/members of the firm. Changes in firm makeup may constitute a ‘material change’ to the firm and can trigger coverage termination (caused by changes in partners/members, changes in ownership or dissolution). When a ‘material change’ occurs notify your carrier promptly to insure continuous claims-made coverage. Just because individuals had coverage under the old entity does not automatically extend that the old entity’s policy coverage to an individual’s new entity.
If merging, dissolving, creating, or acquiring another firm or moving from one firm to another here are some basic concepts to help ensure continuous claims-made coverage:
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Term |
Concept/Definition |
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Prior Acts date |
Date which the insurance carrier will look to determine if a covered act falls under this policy. Generally there is no coverage for any act occurring prior to the Prior Acts Date. Claims-made insured entities may have have firm and/or an individual prior acts dates.The date may also state ‘Full Prior Acts’. |
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Extended Reporting Period Endorsement (ERP) |
It expands the reporting period of a claims-made policy. This allows an insured to report a claim after coverage has been terminated for a covered loss that occurred during the time the policy was inforce. It does not modify any other policy terms or conditions. |
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Predecessor Firm Prior Acts Coverage Extension |
A firm for which a successor firm has acquired a majority of the assets is a predecessor firm. Upon underwriter approval this successor firm to report for the predecessor firms covered acts. As coverage is written on behalf of the named insured firm without this prior acts extension back to the predecessor firm’s prior acts date there will be a coverage issue. If there is a predecessor firm it is important that it is endorsed onto the new firm’s coverage or the old firm purchased an ERP. |
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Career Coverage |
Extends coverage for an individual for individual covered professional acts that occurred prior to that individual joining the current firm. Only work done by the individual is covered under this endorsement. |
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Individual Extended Reporting Period Endorsement (ERP/Tail) |
This endorsement is attached to the last in-force policy that the individual was associated with to extend the reporting period past the expiration date. The ERP term is normally stated as to the number of years or months that the reporting period is extended. As the name implies it only covers (much like career coverage) the individual’s personal covered professional acts. Individual ERP’s can also be non-practicing tails, retirement tails, death & disability tails. |
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Firm Extended Reporting Period Endorsement |
This endorsement is attached to the last in-force policy for the firm. It extends the reporting period beyond the coverage termination date. It is normally stated in months or years that reporting period is extended. In many cases this is the only way to protect former members/partners. |
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ERP Cost |
Some insurance carriers offer individual ERP’s at no cost as long as certain conditions are met.Not all carriers offer individual ERP’s. The cost of the ERP is generally a multiple of the applicable in-force premium. It can range anywhere from .75 times to around 3.5 times depending on the length of time purchased. The cost maybe stated in in-force policy. Once in-force it is fully earned and non-cancellable by either party. |