There are some scenarios, including retirement or joining another law firm, where firms should take a look at their policy to make sure they are covered for all of their previous work.
When reviewing your professional liability policy you may come across certain provisions you don’t typically see in other types of insurance policies. Perhaps one of the most important provisions is the extended reporting period (ERP).
I have worked in several different client facing roles at Protexure over the past 7 years. One common question I have received is “when is an extended reporting period needed?”
Many attorneys have heard this term before and have a general idea of what it is, but there are many misconceptions about when one is needed.
What is an Extended Reporting Period and is it Necessary?
Sometimes referred to as tail coverage, an ERP is a period of time that can be added on to your professional liability policy which allows you, the insured, to report claims even after your policy has expired.
An extended reporting period is intended to cover potential gaps between policies or practices, allowing you to extend the time available to report a claim made against you after the last policy has expired. These options do not provide coverage for claims made over work first begun or performed after that expiration, however.
You might be left wondering, “Do I need to purchase an extended reporting period?” You are not required to have an ERP. However, there are some situations in which you should seriously consider obtaining one. Below we have outlined different scenarios where an extended reporting period is relevant.
Merging Two Law Firms
At some point in your career, there may be the opportunity to join another law firm. Let’s say for example, you’re the owner of Firm A and you’re joining with Firm B to create AB Firm.
The best thing to do in this situation would be for both Firm A and Firm B to buy extended reporting periods so the work done for each respective firm is covered prior to creating AB Firm. This ensures that claims from each individual firm are covered.
Should there be a claim that arises from work done by Firm A prior to joining with Firm B, it will be covered by Firm A’s in force ERP (and vice versa).
Insurers may choose to provide coverage for an attorney joining your firm for work they did prior to joining. In the example above, let’s say Firm A’s Insurer is willing to cover prior work of Firm B, thus eliminating the need for either firm to purchase an ERP. This may seem like a great option, but what happens if a claim arises against Firm B for work done prior to joining your firm?
Unfortunately, that claim may now go against AB Firm instead of just Firm B. If it’s a particularly large claim, that may cause your rate to increase the next year or even make it hard to find coverage.
It might not always be the most cost-effective solution, but having an ERP in place reduces the potential headaches down the road when joining with another firm.
Leaving a Firm To Join Another Firm That Has Been in Business For a While
If both firms have maintained continuous coverage—even if they have switched carriers now and then—you should not need to worry about filling in any gaps on your own.
This is because your former firm’s insurance policies should speak to any claims brought after your departure over work you did while with that firm, while your new firm’s insurance should cover you for all work you do from the time you join the firm.
The only two concerns to affect this would be if you provide any services to clients on your own between the time you leave one firm and join another, or if your old firm fails to maintain continuous coverage after your departure, opening the possibility that you might not be covered if a former client sues after their last policy expires. If you believe either of these two scenarios are a possibility, then an ERP would be a good option.
Leaving a Firm To Strike Out Into Solo Practice
If your prior firm is staying in business and maintaining its malpractice coverage, then you should be able to safely assume that their insurance policies will cover you for any claims made against you after you leave the firm, as long as the claims arise from work you did while at that prior firm.
Lawyer malpractice policies are written to cover work by former members or associates of a firm and, as long as the firm continuously maintains coverage, any in force policy should relate back to any work done by anyone from the firm in prior times.
The caveat here, however, is that, if your former firm goes out of business or fails to continuously maintain coverage, you may need to seek some sort of endorsement from their past carrier, or from your current carrier, to fill in any possible gaps in coverage.
When the time has come to hang up your hat, you most likely have many years of prior work that needs to be covered. It is important to maintain some extended coverage because you could find yourself hit with a lawsuit several years after your last day at work, depending upon the nature of your practice and limitations periods in your jurisdiction.
An ERP is the only option to keep you covered into retirement. If you choose not to purchase an ERP at retirement, you will lose coverage for any amount of prior work you’ve done. Since your malpractice policy is a claims-made policy, it doesn’t matter if you carried coverage at the time when the work was performed.
Luckily, most insurers have language in their policies regarding retirement tail coverage. Most carriers will offer a very reasonably-priced extended reporting period for retiring attorneys provided they have been insured with that carrier for some specified period of time. Depending on the insurer, you may have the ability to get an ERP for free.
Thus, if you’re planning to retire within the next five years, it’s not in your best interest to switch from carrier to carrier, chasing lower prices or scaling back coverage; what you think you’re saving could cost you more later on if you can’t find the tail protection you’ll need in retirement.
Another important risk to consider in retirement: if you are retired, stay retired, or you could jeopardize whatever extended coverage you put in place. Your extended reporting period won’t speak to claims arising from work you do after your last policy expired, and that new work may even void your retirement endorsement terms.
How do you get an Extended Reporting Period?
Whether you’re joining another firm, closing your old practice, or retiring, an ERP is the easiest way to make sure your prior work is covered, but how do you go about getting an ERP?
Always be sure to check your policy for specifics regarding ERPs.
As mentioned previously, your insurer may have language regarding free tail coverage for retirement. Otherwise, tail policies are not free. Typically, they are a certain percentage of your previous policy premium, depending on the length of the ERP you want.
Be sure to speak with your agent regarding this as they can guide you through the process and let you know what to expect as far as premium.
Should You Purchase an ERP?
It’s not required by the insurance company that you obtain an ERP for prior work. However, it is perhaps the simplest way to ensure that your prior work is covered.
Do the scenarios previously mentioned apply to you? Then you should purchase an ERP.
Although you may not have a previous claim, you don’t want a career transition to be spoiled because an ERP wasn’t considered. Obtaining an ERP can give you peace of mind that your future will be protected.