Everything comes to an end, even — and maybe especially — when it comes to insurance. But that doesn’t mean you can’t get an extension.
I have been a Renewal Account Executive with Protexure for three years now and as I have emerged in the insurance environment I find that no law firm is the same. However, many law firms share very similar situations and concerns.
One of the most frequent questions I’m asked is, “How much is an extended reporting period/tail policy?” Of course, this is an important and consistent question because, at the end of the day, things do come to an end.
Whether you are switching law firms, striking it out on your own, or retiring from the practice of law altogether, you want to make sure that your prior work is covered.
Securing coverage well into your future for your past work does come at a price, but, how much will it cost for your specific situation? Below we take a look at what an extended reporting period is, when you might need one, and, most importantly, how much it will cost you.
What is an extended reporting period?
An extended reporting period (ERP), also widely known as a tail policy, is an endorsement that covers a law firm’s and its affiliates’ prior acts. (A prior acts date is the initial start date of when an insured obtained coverage for the work they perform on behalf of their firm entity).
An extended reporting period is a period of time that can be added to your policy and is intended to cover potential gaps between insurance policies. An ERP allows you to extend the time available to report a claim after the last policy has expired.
Some situations where an extended reporting period is necessary are:
- When merging two law firms
- When an attorney is leaving a law firm to join an established firm
- When an attorney is leaving a law firm to create a solo firm
- When an attorney is retiring
In each of these situations, an extended reporting period is needed to cover the work done while with the previous firms. The ERP will act as continuous coverage and help you maintain your prior acts date.
How much does an extended reporting period cost?
The cost of an ERP can significantly vary. An ERP may be between 100 percent of a law firm's annual premium for a 12-month endorsement to 300 percent of a firm's annual premium for an unlimited endorsement.
Depending on your length of coverage, it can also be free.
Costs vary depending on the scenario the insured is seeking the ERP under and what kind of ERP they are looking to obtain. Some scenarios are as follows:
- Merging two law firms
- Leaving a law firm to join an established firm
- Leaving a law firm to create a solo firm
Each of these are very different paths and can result in very different premium prices.
The path of a disbursed firm tends to look like this:
Let's say there is a two-person firm and both attorneys have decided to go their separate ways and start their own individual entities. They wish to dissolve Law Firm X and purchase an extended reporting period to put in its place.
Depending on what point in the policy the attorneys are at, for example, Law Firm X is at mid-policy and has successfully separated their book of business, they are no longer performing work under their old entity.
It would be in their best interest to first, cancel their policy and get their unearned premium back. The farther out from their policy expiration, the larger the unearned premium would be. At the time of submitting payment for the ERP, Law Firm X can request that their unearned premium be applied to their ERP policy premium.
Once the policy is canceled, they then request an ERP quote. The quote provides different options in regard to how long they would want the ERP in place for:12 months, 36 months, 60 Months, 72 Months, and unlimited. Each option is priced differently: the 12-month plan is 100% of the annual premium; 36 months is 185%; 60 months is 225%; 72 months is 250%; and unlimited is 300%. An unlimited plan does not have an expiration date, it will cover the firm's prior acts, forever.
How to select an ERP option
Selecting an option can be a bit tricky. Some lawyers may view ERP as a necessary evil, that they don’t particularly want it or like the idea of spending money on it, but it does provide peace of mind.
So when trying to select an option it is important to consider all of your prior acts, not just the most recent work performed.
Yes, some states have a statute of limitations so it can be hard for an insured to justify obtaining an ERP extending past that time frame. However, I implore insureds to consider that laws can change over the course of several years.
I also think it is important to keep in mind that lawyers are providing work on behalf of people, and people can be emotionally driven. Thus, you can find yourself in a bad situation if you do not protect yourself adequately.
In addition to and possibly most rationally, it is important to consider the type of work you have performed, of course, all areas of practice have their own risk level, however, some categories or large volume accounts can leave room for a potential claim to be filled for years to come.
Once the firm decides on what option they want to bind with, they sign the quote and submit a one-time, full-premium payment.
The cost of an ERP covering retirement
Retirement is an additional circumstance that calls for an ERP/tail policy. Pricing for this varies depending on how long an insured has had coverage with the insurance provider.
For example, Protexure offers a Non-Practicing ERP for any insured who has been with our program for over three consecutive years and is now ceasing their practice completely and retiring. This Non-Practising ERP is written as an unlimited endorsement, which will run forever. It is also of no premium charge to the insured.
This is why when we talk to lawyers, whether they are our clients or not, we encourage all insureds who are rounding retirement to stick with their current carrier. It is more likely than not that the insurer has a similar program to ours that offers retiring insureds free tail coverage.
The extra protection an ERP offers
An ERP is an important extension of coverage that is usually a worthwhile investment to protect you and your firm's work. Having an ERP will help protect you from financial hardship and offer peace of mind knowing your work is still under coverage even if you are moving on to a new venture or are retiring.
With the current circumstances that we have experienced over the last few months, one thing is common among all of us. Life is uncertain.
I have talked with several attorneys with coverage, some of whom have decided that they will be winding down their practice sooner than anticipated, and others have made the decision to not renew and retire. It is important to know your options as you continue on this path. Please ask questions, and get informed. Let us help you plan accordingly.