Your law firm is closing. The firm has maintained attorney malpractice insurance since the firm’s inception. But remember that all attorney malpractice insurance policies sold in the USA are claims-made coverage. When the last policy terminates so does your past acts coverage unless you have an Extended Reporting Period Endorsement attached to the policy. Given that you will need to purchase an Extended Reporting Period (ERP) Endorsement commonly called a tail. Your agent tells you it is going to cost 3 times the expiring premium to buy an unlimited ERP. The cost is a lot higher than expected and the agent wants the entire amount prior to binding the ERP. To put this in numbers, if your expiring premium is $10,000, the ERP at 3 times expiring is $30,000 and it cannot be financed. You are not happy, so you try to shop for a better price.
While shopping might be the American Way, it is a waste of time for an ERP. An ERP is an endorsement that is attached to the last policy inforce. It is not stand alone insurance coverage. The ERP does not amend the current policy coverage, limits, or deductible. The only thing that an ERP endorsement does is ‘Extend the Reporting Period’ to be able to report claims covered under the policy. An ERP’s cost is determined by the number of years you want to extend the reporting period multiplied by the expiring premium. A one-year extension of the reporting period may cost one times expiring but terms and conditions differ by insurer.
Right, wrong, or indifferent, the only viable option is the ERP through your incumbent insurer that is on the risk at the time the coverage is terminated. For example, the Travelers policy ERP costing 3 times the expiring premium buys an “Unlimited” Extended Reporting Period endorsement. Each malpractice insurer has different factors that are used to purchase the ERP endorsement and not all offer the same reporting period time extensions. But the concept for the cost is the same; it will be a multiple of the premium in force at the time coverage was terminated. The ‘right’ and terms for the Law Firm to purchase an ERP is generally spelled out on the declarations page, in the body of the policy or an endorsement that is attached to the policy when it was issued. The attorney malpractice ERP terms are non-negotiable with the incumbent insurer. Generally, the law firm loses the right to purchase within 30 to 60 days past coverage termination, so it is important to check applicable policy provisions for the exact number of days. Another important aspect to note is that because the ERP is fully earned and non-cancellable once issued, it cannot be financed and must be paid in full up front.
With that stated there are certain surplus lines or non-admitted insurance ‘claims-made’ policies that do not afford the insured the right to purchase an ERP unless the insurer cancels coverage or will not offer a renewal. The ERP in these malpractice insurance policies are sometimes called a ‘One Way Tail’. For those with this situation, read on………
With a One Way Tail the only option is likely an Attorney Malpractice ‘Run-Off’ policy. A Run-Off policy is generally much more expensive, tightly underwritten, with lesser coverages. As another insurer will not attach an endorsement to the expiring policy these are standalone insurance policies with their own terms and conditions that only cover past acts. Attorney Malpractice Run-Off policies are generally written on an annual basis and may or may not be renewed at the discretion of the insurer. The insurers that write this coverage are ‘Surplus Lines’ or ‘Non-Admitted’.
An attorney malpractice Run-Off policy does have its place, but it is not a good replacement for purchasing the ERP from the incumbent insurer. Generally, the one-year cost of the Run-Off policy will cost as much as the cost of a multiyear ERP endorsement. Once the Attorney Malpractice Insurance ERP endorsement is in place, it cannot be cancelled. Whereas an annual Lawyers Run-Off policy may or may not be renewed by the insurer.
Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080