Snips and Snails and Liability Tails
October 13, 2006 06:28 PM
By Carol Bauman, Daniels-Head Insurance
An important protection feature in a claims-made policy is "tail" coverage. While many assume that this option is only necessary when an attorney retires, actual experience indicates that the options are exercised for varied reasons and needs. An understanding of this policy feature is as important as the feature itself.
Once a claims-made policy ceases, the coverage ceases, unless an Extended Reporting Period option is exercised. This means that there would not be coverage for an error made while the policy was in force if the reporting of the error or claim occurred after the termination date of the policy. Because of this, claims-made policies contain Extended Reporting Period options. These options are not standardized and vary from policy to policy and company to company. The wise consumer will check the policy language to determine the scope of the coverage being offered here...
1) WHAT IS "TAIL" COVERAGE?
"Tail" is jargon for an Extended Reporting Period. An Extended Reporting Period is an endorsement that is usually purchased based on the options contained in a claims-made policy. The exercise of an Extended Reporting Period allows claims to be reported after the policy terminates. Since this endorsement only affects the time allowed for claim reporting, all other terms and conditions of the policy remain the same. This means that the same prior acts coverage available under the policy would be available if an Extended Reporting Period option is exercised. All other endorsements would continue. The same limits of liability and deductible would apply.
It is important to note here that, in most cases, the limits of liability are not reinstated at the inception of the Extended Reporting Period. That means that if a claim has reduced the limits of liability on the underlying policy, it is only those reduced limits that would be available for the duration of the "tail."
Since the Extended Reporting Period is an endorsement on an underlying policy, the option is only available from the carrier of the current policy. A "tail policy" is a misnomer as a "tail" is not available as "stand alone" policy separate and apart from an existing Lawyers Professional Liability policy.
2) WHY DO I NEED IT?
Often, the assumption is made that an Extended Reporting Period is only needed if an attorney retires. Actual experience is that a 'tail' is needed in many more circumstances than just retirement.
A lawyer may leave private practice for many reasons. An attorney that takes a Sabbatical to raise children, care for an ill family member, recover from an illness or accident, go to the Bench or just have "time off," will still have continuing liability for legal services rendered prior to the date of departure from the law practice. Since the coverage ceases when the policy ceases [unless an Extended Reporting Period is exercised] this can leave the attorney vulnerable to an uncovered claim.
Attorneys who practice as a sole proprietor and then join a larger firm or become In-House Counsel also have liability for prior work that would necessitate the exercise of an Extended Reporting Period. A caution here: if a lawyer does join another law firm, he or she must very carefully check the new firm's coverage by reviewing the policy language of that firm's policy. Often there is a misunderstanding that if a policy includes prior acts coverage, that prior acts are covered for all attorneys. Most times this is not the case. Policy language and policy definitions may restrict coverage only to work done on behalf of the Named Insured. If the attorney's prior acts were for another firm or their individual practice, coverage may not apply. In this situation it is advised that the attorney request either an endorsement that provides coverage for the individual attorney's prior acts or that a representative of the carrier provide some evidence that coverage extends to the individual's liability for their previous work. It is likely that premium will be charged for this additional exposure. If neither an individual endorsement or written confirmation of coverage can be obtained prior to the time limitations for the exercise of the Extended Reporting Period, then the "tail" should be purchased to protect the attorney from the prior acts exposure.
When partnerships and law corporations disband, there can be continuing liability. The purchase of an Extended Reporting Period will separate the legal services, and claim potential, of the old entity from that of the new entity (or entities). The cost of the Extended Reporting Period can appear expensive, but it is a smaller cost than the upset and time involvement of becoming a deep pocket for someone's former partner or colleague. With joint and severally liability, an "innocent" individual can become liable for the actions of former firm members. Indeed, just a larger deductible for bigger firm's can be daunting in the event of a claim against a disbanded entity.
The purchase of an Extended Reporting Period at the time of the firm dissolution may prevent hard feelings and large costs associated with later claims. Often, it is the former partner or colleague who does not purchase coverage that may have a claim based on work done while with the disbanded firm. Without coverage or means to pay, other former firm members may become vicariously liable for that attorney's claim.
Claims history may also create a need to exercise an Extended Reporting Period. If a Company cancels or non-renews a policy due to claims, finding new coverage may be difficult or impossible. It will likely be very expensive due to the increased underwriting risk and corresponding increase in premium. If the limits of the cancelled policy have not been depleted by the claim or claims, then the purchase of the "tail" will provide some coverage for legal services performed prior to the policy termination date. If new coverage is available, the purchase of the ERP may reduce the cost of the new coverage by eliminating the need for prior acts coverage prior to the date of the inception of the Extended Reporting Period. It may also make an underwriter more willing to offer coverage. This is often the case if a single firm member is responsible for the claims and that attorney has left the firm. An Extended Reporting Period purchase in this circumstance will help isolate any continuing claim exposure and improve the underwriting profile of the uninvolved attorneys.
3) WHAT ARE MY OPTIONS?
The Extended Reporting Period options available to an attorney are generally contained in the insurance contract [policy] itself. Look for terminology such as "Extended Reporting Period Options" or "Purchased Optional Extension Periods."
It is a good idea to review this policy section carefully as it can avoid unpleasant surprises later on. Many policies will provide a good description of the options available including the method of determining the premium. For instance, the policy language may state that "the cost of a thirty-six month option is 185% of the annual premium." If the policy premium on the current policy is $1000, then the cost of a three year "tail" would be $1000 x 185% = $1850. For an attorney that is planning to make a practice change, this policy section can allow some proactive planning tools. Beware the policy that states something like "the price, terms and duration of the Extended Reporting Period shall be solely at the discretion of the Company." The attorney is at the mercy of the Company with that type of policy language. And the cost and term of the "tail" will be whatever the Company wants it to be.
This policy section will also let you know whether or not an initial option is renewable. It will most likely also indicate any restrictions to the exercise of the option. Most policies will not allow an option to be exercised if an attorney's license has been revoked or suspended or is otherwise not in good standing with the State or local Bar or regulatory authority. It also may not be available if the policy is cancelled for the non-payment of premium or deductibles due to the company.
In some policies, an option is available if and only if the Company cancels or non-renews the policy. This type of restrictive "one-way" policy language does not allow an attorney much choice or control in the event she or he needs to exercise the protection afforded by an Extended Reporting Period. Be wary of this restrictive language as the net effect of it can be so limited or so expensive that the net effect is that no option is available.
Select policies will also generally include Non-Practicing Options that may offer additional features to the attorney that is leaving private practice. These options may waive the deductible, reduce or waive the premium cost, offer an unlimited option or some other benefit to the policyholder. Review of this policy section, particularly if the attorney contemplates retirement in the near future, may provide clarity in the purchase decision.
Today, Lawyers Professional Liability policies often provide Death and Disability protection in the range of Extended Reporting Period Options. Under this type of option, an attorney, or his or her heirs, may qualify for an Extended Reporting Period without the payment of additional premium. This can be an important estate planning option for an attorney and protection for her or his family. Additionally, the deductible may be waived. The availability of this option may require maintaining insurance coverage with the Company for a prescribed number of years. A check of this policy feature will usually clarify any type of longevity requirement.
4) WHAT IF I DON'T HAVE AN OPTION?
There may be circumstances where an Extended Reporting Period is not available. Likely situations include: the policy limits being exhausted due to a claim; the price or term of the option makes it impractical, the option is so restricted in the policy that it cannot be exercised, or an option is not available to an individual attorney in a multi-attorney firm [i.e., the option is only available to the Name Insured]. If this is the case, then coverage should be continued, if possible, or prior acts coverage obtained under another policy or with the new firm. Options may be negated if the policy has cancelled for the non-payment of premium or if deductible or other monies are owed to the Company. These restrictions can generally be found in the policy language.
Additionally, possible claims or incidents that may give rise to a claim should be reported to the Company prior to the termination date of the coverage if an insured is aware of such a possibility. The policy should be reviewed for claim reporting requirements. In the case of potential claims, Companies generally require the potential claimants name, a description of the circumstances or error that may give rise to a claim and the manner in which the attorney became aware of the possibility of a claim. While claims-made policies generally provide for the early reporting of discovered potential claims, sending a "laundry list" of all clients or matters handled by the firm will most likely result in a resounding rejection from the company claim department. Policies also contain terms and conditions for the reporting of claims or potential claims and these conditions must be met for coverage to apply.
5) EXERCISING AN OPTION
The policy also specifies the terms and conditions of exercising an Extended Reporting Period Option. These terms and conditions ordinarily include time limitations, payment conditions, notice requirements, license standing, etc.
The policy section that provides the Extended Reporting Period options should clearly specify any time limitations for the exercise of an option. Usually, an option must be exercised within thirty to sixty days after the termination of the policy. Again, check the policy language for specific information. Some policies require that the option be exercised prior to the policy expiration date so waiting until the policy expires to check one's options may result in being too late to take advantage of the options available in the policy. All the required elements must be received by the Company or its representative on or before the date limitation. Do not assume that a postmark dated the last day to exercise the option will make that option available. The importance of this protection means that enough time should be allowed to send the required items as well as follow up on their receipt. If necessary, one can overnight any missing item or replace items that have not been received.
In general, written notice and full payment are required in order for the company to issue a "tail" endorsement. Also important to keep in mind is that the premium is fully earned, or non-refundable, once the "tail" option has been purchased.
