Professional liability insurance coverage: setting the record straight

When the Indiana Lawyer ran a story in December about the Indiana State Bar Association’s legislative proposal for a new statute of repose, the story quoted me as follows:

ISBA President Jeff Hawkins said the proposal to limit the timeframe for malpractice was developed by the bar’s Probate, Trust & Real Property Section, driven in part by difficulties retiring lawyers faced planning for potential liability. “Their eyes were bulging when they found out how difficult it would be to get potential liability coverage for the rest of their lives,” Hawkins said.

“They found they could not be responsible enough. The insurance industry didn’t have a solution to address a potentially open-ended responsibility.”

Soon after the article’s appearance, I had an enlightening conversation about the subject with Jennifer Ritman, founder and president of Ritman & Associates, the State Bar’s endorsed professional, business and personal insurance agency. Jennifer explained that her agency has helped many retiring and disabled lawyers obtain professional liability coverage for prior acts and omissions. That conversation led me to seek her help in dispelling professional liability insurance misconceptions through a Q&A installment of this month’s “President’s Perspective.”

Hawkins: Jennifer, thank you for helping me clear the air on this important insurance subject. As my quoted comments indicated, I thought a retiring lawyer would have to pay professional liability insurance premiums for life in order to maintain “prior act” professional liability coverage. How was I mistaken?

Ritman: Most claims-made policies offer Extended Reporting Period (ERP) options. So what is an ERP? You somewhat have to start at the beginning to understand what a claims-made policy is, Jeff, and your comment about having to pay premiums for life is why the carriers do, in most cases, offer ERP options. Claims-made policies basically read: “You have to have a policy in place at the time the claim is made.” This is where the misunderstanding and difficult maneuvering of these policies begin. If you have to have a policy in place to report, then how do you retire, merge or laterally move to another firm? This is where the ERP comes in – it does exactly that – it extends the period of time to report from an expiring policy. So, in order for you to not keep paying premiums when you retire, you obtain an ERP so that you have more time to report claims/incidents in the future for work you did in the past that would’ve been covered by the expiring policy.

The question is, does the policy offer the ERP only for the entire firm, or does the policy offer the ERP to individual members of the firm? There is generally more than one type of ERP as well. One of our favorite carriers has the following types available: Option to Purchase Optional ERP, Option to Purchase Non-Practicing ERP and, believe it or not, Option to Elect Non-Practicing ERP at no additional premium.

Hawkins: In what kinds of situations should lawyers seek tail coverage?

Ritman: The term “tail” coverage is often misunderstood or used to label multiple types of coverage. Some folks refer to an ERP as tail coverage, and some folks refer to tail coverage as “prior acts” coverage. You always want to maintain your “prior acts” coverage if you can, and you certainly want to elect ERP coverage when retiring. You may need to purchase ERP coverage if your firm is merging with another firm and the new carrier will not provide “prior acts” (tail) coverage. There are ways generally to get this type of coverage underwritten, but you have to know how to maneuver the carriers to get this done.

Hawkins: Are there any differences in the coverage effects and claims procedures between tail coverage claims and claims during active practice? For instance, can the carrier drop coverage after a tail claim?

Ritman: Once ERP coverage is issued, it is non-cancellable by the carrier and non-renewable by the purchaser. So a carrier cannot cancel your ERP once issued, and this is generally why if there’s a charge associated with the ERP it has to be paid in full up front, prior to issuance. Limits of liability can come into play here if you have an ERP with $1 million in coverage and you have a claim or claims that exhaust that limit. Then, simply put, the limit is exhausted, and you would have no further coverage.

A claim attached to an active policy versus a claim attached to an ERP policy should have no difference in how the claim is handled. However, a claim on an active policy could trigger rate increases or the potential of being non-renewed.

Hawkins: What else should lawyers know about tail coverage?

Ritman: You really have to understand the complexity of claims-made policies, how they work and what ERP options your carrier offers. You do not want to be in a position where you are getting close to retirement and you continually shop and carrier jump to save a few dollars. You want to plan with your agent in advance for things like retirement so that your agent can guide you to the best solution. Maybe you are one year away from retiring, and you’ve been with ABC insurance company the last two years, and the carrier is talking rate increase. Don’t just immediately shop and move your coverage. You may be better served to pay the increase for the additional year of coverage and be able to elect the ERP at no additional premium at the end of the next policy period.

Hawkins: Thank you, again, Jennifer! Your responses have confirmed to me the value of this discussion. I encourage ISBA members to follow up with Ritman & Associates about specific professional liability insurance questions and check with the ISBA staff about all of our membership benefits and endorsed service providers. A complete listing of ISBA membership benefits and endorsed service providers appears on the ISBA website at http://tinyurl.com/ISBA-member-benefits (once you’ve signed in, discount codes & such are revealed to you).

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