Claims Retrospective: Knowledge about Extended Reporting Periods, or Tail Coverage, Is Salient When Individuals Retire and/or Firms Cease Doing Business.
By Sarah A. Johnson, Esq.
Due to the claims-made nature of professional liability insurance policies, sole proprietors and insured firms and their employees should consider Extended Reporting Periods (ERPs) or tail coverage when individuals retire and/or firms cease doing business.
Almost all professional liability (PL) insurance policies are written on a claims-made basis. When insurance coverage is written on a claims-made basis, the date that the claim is first made is determinative of whether there is a potential for coverage under the policy. Specifically, the claim must be first made within the coverage period (i.e., the one-year period listed in the declarations page) in order for there to be a potential for coverage under the policy. This means that the professional, as the insured, must first receive a demand for money or services within the coverage period.1
Accordingly, claims-made coverage may require responsible professionals to keep coverage in force for years after they stop practicing, depending on the applicable statutes of limitations and/or repose, as claims may surface years after the alleged act, error, or omission on which they are based. If a claim arises years after the professional services and the professional has no current PL policy in place, he or she will face uncovered exposure. Most insurance companies offer coverage designed to address this situation, typically referred to as an ERP or tail coverage.
An ERP, or tail coverage, does not provide coverage for insureds for claims involving errors or omissions that occur in the present but rather provides coverage for the claims involving errors and omissions that occurred prior to the expiration of their last full policy. Basically, an ERP allows the Insured an extended period of time to report claims, hence the phrase “Extended Reporting Period.” If an ERP has been purchased, a claim arising out of errors and omissions that occurred prior to the expiration of the insured’s last full policy will be covered if the claim is made within the ERP. ERPs can be in effect for a year, several years, or even indefinitely.
Many sole practitioners understand the significance of purchasing tail coverage upon their retirement. However, individual engineers who work for a firm do not always understand how they can be personally affected by a previous firm for which they worked ceasing business without purchasing tail coverage.
In certain instances, the individual engineers working for a firm may erroneously believe that they are shielded from lawsuits by the corporate entity. Their line of reasoning is: who cares if a claim is brought against the defunct firm as it has no assets and any judgment against it will be uncollectible. However, in many jurisdictions the individual engineer may be personally held liable for his/her errors and omissions even if the work was performed on behalf of the firm. This is because courts in many jurisdictions find that the engineer as a professional owes a duty to others.
For illustrative purposes, please consider the following scenario. Individual engineer X works for ABC firm. ABC firm goes out of business and simply lets it policy expire without buying an ERP, or tail coverage. Upon or prior to the closure of ABC firm, individual engineer X starts to work for DEF firm, which has and maintains its own professional liability insurance coverage. 2 years later, a former client of ABC firm files suit against individual engineer X, alleging errors and omissions in individual engineer X’s work on behalf of ABC firm. There is no coverage for individual engineer X on ABC’s last policy because it has expired. There is also no coverage under DEF firm’s current policy because individual engineer X’s professional services were not performed for DEF firm.
As the above example illustrates, it is important for individual engineers to take an interest in the insurance coverage maintained by their firms, particularly in instances where the firm may desire to wind down or discontinue business. In these instances, insureds should be knowledgeable about ERPs and tail coverage and inquire as to whether such coverage is being considered or purchased in order to protect not only the firm but also the individuals that performed services for the firm.
1Most policies include provisions allowing for insureds to report potential claim circumstances so that the potential for coverage for any resulting claims is preserved under the policy under which the potential claim circumstance is reported. However, an insured typically cannot report potential claim circumstances during an ERP.
