A frequently asked misguided question from attorneys is wanting to purchase a tail policy or shop their tail policy coverage. My response upsets some. There really is no such thing as a ‘tail policy’. I am sure that many attorneys stop reading right there, but hopefully not! Because confusion over what a tail is and is not can have serious consequences later on. This blog attempts to clear up these misconceptions of your important ERP (Extended Reporting Period) rights. Yes, this is long winded but spending another 10 minutes here can protect your assets.
Normally an attorney leaving the practice of law can’t purchase a malpractice policy when he or she will no longer be actively practicing law. There nothing now to insure as there are no current covered acts occurring. Everything the attorney wants to insure happened in the past. An attorney can’t normally buy a claims-made standalone ‘tail policy’. What you want to purchase to cover your past acts is an extended reporting period endorsement (ERP) from your incumbent insurer. This endorsement attaches to the last in force claims-made policy. In short, purchasing an ERP, commonly referred to as tail coverage, provides an attorney the right to report claims to the insurer after the last policy has lapsed or been cancelled. Under most ERP provisions, the purchase of this endorsement does not add additional coverage for ongoing acts and is not a separate policy. The significance of this is that under an ERP there would be no coverage available for any act, error, or omission that occurs during the time the ERP is in force.
Be aware that if a claim were to arise several years post retirement out of work done in retirement as a favor for a friend, there would be no coverage for that claim under the ERP. Never help on a DUI while in retirement or practice law of any time. It can be tempting, but don’t practice a little law on the side in retirement because your ERP will not cover any of that work. This can also invalidate an ERP retirement endorsement.
Or take for example that for some reason during your practice of law, you decided that you did not need malpractice coverage. But now that you are approaching retirement you have decided to protect your assets. Or you are about to embark on a new career as a judge or prosecutor and are required to cover your past acts. A ‘Runoff Policy’ is what you will need to purchase. Note that ‘Runoff Policies’ are fairly expensive, fully underwritten, and normally (unlike an ERP endorsement) need to be renewed annually. There is also no ‘Guarantee Issue’. Only some brokers are aware of this coverage, L Squared is one of those brokers that can help.
Care needs to be taken to protect your coverage when an attorney semi-retires and decides to purchase a policy with reduced limits to save a little money during the last few years of practice. Insurers will not allow attorneys to increase policy limits at full retirement. The resulting premium savings that came with the reduced limits on the final couple of policies can turn out to be false savings. All claims reported under the ERP will be subject to the available remaining limits of the last policy that was in force at the time the ERP was put in place and this may not be enough coverage.
So if you reduce your coverage limits from $1,000,000 per occurrence/$2,000,00 aggregate to $500,000 per occurrence/$500,000 aggregate during the last couple of years of active practice, you will only have coverage of $500,000 per occurrence/$500,000 aggregate available to you for all of your retirement years assuming there was no loss payout under that last policy. Remember there are two coverage limits. A per claim and an aggregate. The aggregate for a solo practitioner is seldom an issue during your active practice years as the aggregate limit is ‘refreshed’ at the renewal of each policy period. But once the ERP is issued that aggregate limit is reduced by claims brought during your last year of claims-made coverage and during your retirement. It is never ‘refreshed’ again. There can be a real possibility that your ERP becomes worthless if the aggregate limit is too low. Therefore, if you anticipate wanting those higher limits of $1,000,000/$2,000,000 during your retirement years, keep those limits in place heading into retirement.
Unfortunately, while many attorneys hope to obtain an ERP at the end of their career, the availability of tail coverage isn’t necessarily a given. For example, most insurers prohibit any insured from purchasing tail coverage when an existing policy is canceled for nonpayment of premium or if the insured failed to reimburse the insurance company for deductible amounts paid on prior claims. An attorney’s failure to comply with the terms and conditions of the policy; the suspension, revocation, or surrender of an insured’s license to practice law; and an insured’s decision to cancel the policy or allow coverage to lapse may also create problems.
Particularly for retiring solo practitioners, insurers frequently provide tail coverage at no additional cost to the insured if the attorney has been continuously insured with the same insurer for a certain number of years. Given that an ERP can be quite expensive, shopping around for the cheapest insurance rates when nearing retirement is a poor idea if you lose a free ERP. As with other aspects of retirement planning, review policy provisions and/or talk with your agent well in advance of contemplating retirement so as not to unintentionally lose this valuable benefit.
The situation for an attorney who has been in practice at a multi-member firm is more complex. When an attorney wishes to retire, leave the profession, or is considering a move to another firm and is worried about the stability of the firm he or she is departing from, some insurers will not offer an opportunity to purchase an ERP due to policy provisions. Remember the firm’s existing policy may continue to protect attorneys after departure. Normally this is not a problem as the departing attorney continues to rely on former policy language under the definition of who is insured. However, because the definition of insured varies among insurers, you should discuss this issue with your firm’s malpractice agent so options can be identified and reviewed well in advance of any planned departure. But there are some insurers that do not cover past attorneys at the firm. In these cases, the departing attorney needs to arrange for an ERP with the incumbent insurer. Firm stability is also a consideration when departing a firm - if the prior firm does not maintain continuous claims-made coverage, the departing attorney is likely out of luck.
The period in which one can obtain an ERP is also time bound. Most policies provide a 30 to 60-day window that starts to run on the coverage termination date (expiration or cancellation date of the policy). Many surplus lines insurers require that the insurer either cancels coverage or will not offer a renewal to be able to purchase an ERP. Given these policy provisions, you should review relevant policy language well in advance of contemplating departing the profession as the opportunity to purchase an ERP is one you can’t afford to miss.
The ERP coverage varies depending upon the length of time purchased. Coverage is generally stated in terms of one, two, three, four, or five-year reporting periods or with an unlimited reporting period. As most do not have a renewal option, if available to you, the unlimited reporting period makes the safest choice particularly for attorneys that handle long duration practice areas such as estate work or dealing with minors.
The premium charge for an ERP is usually specified in the policy. Often the cost is a fixed percentage of the in-force policy premium and can range from 100% to 350% depending on the duration of the purchased ERP. Because the ERP cannot be cancelled once in force, insurers require the premium to be paid in full up front and premiums financing is not normally available.
Particularly for solo attorneys, if the unexpected ever happens such as your untimely death or disability while still in practice., it is important that your heirs and your backup attorney be aware of your malpractice coverage as an ERP can be obtained in the name of the disabled or deceased attorney’s estate in accordance with policy provisions. So even if you are not nearing retirement yet, make sure that you have a basic awareness of your ERP policy rights.
Remember that malpractice is sleep insurance. The more you know about your coverage the better you will sleep.
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Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080