Attorney Malpractice policies are written on a claims-made policy form. With claims-made policy forms, when the policy terminates so does the coverage and there is no coverage for claims reported after the coverage termination date. The Attorney Malpractice Extended Reporting Period (ERP or Tail) endorsement should be purchased when a firm is closing and there is no successor firm. The ERP cost is based on the expiring premium and the number of years that the endorsement extends the reporting period.
Attorney malpractice ERPs can be expensive. If the policy premium were $20,000 annually, in this example purchasing an ERP for one year would cost $20,000 or one times the annual premium (note that all insurers have their own tables for calculating the premium of the ERP, this is just an example). If the insured were to purchase an unlimited ERP in this example, it would cost around 3.5 times the expiring premium or $70,000 ($20,000*3.5). The ERP is fully earned and cannot be canceled by either party once put in force or financed.
Now on to the story:
Many years ago, a law firm was splitting up. The law firm’s annual malpractice premium was around $20,000. The state that the firm resided in had a ‘one-year’ statute for attorney malpractice. For this state it was from the date that a client would reasonably know that a malpractice error had been committed.
Faced with a potential $70,000 ERP premium, the senior firm partner decided that a one-year ERP was adequate. The firm had been claims free for many years and knew of no issues that could reasonability cause a malpractice claim. The firm closed and paid the $20,000 needed to put the one-year ERP in force. About 14 months later, the old firm was served with a malpractice claim both individually and as a firm. The claim was reported to the prior incumbent carrier for the firm. Coverage was denied.
Many of the individual former partners reported the claim to their new incumbent insurers. As their new claims-made coverage did not extend to the old firm and did not provide past acts coverage, the claim was declined by their new respective insurers. One former partner was no longer in private practice and had no current insurance.
In the end, the six partners were exposed to a mid-six figure claim without any coverage. Purchasing the one-year ERP was ‘Penny Wise and Pound Foolish’.
Lee Norcross, MBA, CPCU
Managing Director, CEO
(616) 940-1101 Ext. 7080