Having gaps in your liability coverage is like venturing out into a snowstorm without an overcoat. In either case, it’s tough to succeed without protection. Before purchasing any insurance policy, you need to fully understand the basic structure of the contract in terms of what’s covered and not covered.
In general, liability policies are written as “claims-made” policies; that is, the claim for a wrongful act, error or omission must be made and reported to the carrier while the policy is in effect. This means that should your current insurance policy terminate for any reason, such as the insurer refusing to renew or your firm allowing the policy to lapse while shopping for new coverage, any wrongful acts occurring during this gap between the expiration of the old policy and the start date of the new one will not be covered unless you have either “prior acts coverage” or “extended reporting endorsements.”
The first of these, “prior acts coverage” is written into your new policy. This allows for all incidents leading to claims after your former policy expired to be covered regardless of when they happened provided the coverage is written without a time limitation. There is generally a surcharge for this unlimited coverage based upon how many previous years you want covered. A carrier will not always write this type of “full prior acts” coverage even if you agree to the surcharge. For example, a carrier may refuse because information on your application indicates a high level of risk. Another alternative may be that the carrier provides full coverage, but only within a more restrictive policy. The carrier may also elect to provide prior acts coverage but with the stipulation that coverage would not be in effect under certain circumstances, such as a claim in which the firm knew of the wrongful act, error or omission or should reasonably have know about it prior to the start date of the policy.
Adding “extended reporting endorsements” or “tail” coverage to your current liability policy allows you to make and report claims for prior wrongful acts, errors or omissions after the policy has expired for a specific period of time. There are several instances when this type of coverage is critical. The first is when the insured is changing carriers and “prior acts coverage” is not available or is too restrictive in scope. Secondly, this coverage is even more important when the carrier change is necessitated by the insurer’s refusal to renew coverage and your law firm doesn’t have an alternative yet. There is an additional surcharge for extended reporting coverage.
The other scenario in which this coverage is vital is when a lawyer is no longer actively practicing. When an attorney retires, becomes a judge, or goes from private practice to in-house counsel, the exposures that may arise from the former practice can be covered by “extended reporting endorsements.”
The time to determine what kind of extended reporting your policy provides is before you purchase. Each carrier determines how long an extended period they will provide, under what conditions this coverage can be purchased, and the cost for such an endorsement. In some cases, the coverage is sold in multiples of the policy premium; while in other cases, the cost is the rate that is in effect at the time the endorsement is purchased.