A little discussed issue is the remaining Extended Reporting Period (ERP or Tail) aggregate policy limit being depleted (Burning the Limit). An ERP is attached to the last inforce policy. The ERP endorsement does not change the terms of the policy or reinstate policy liability limits used during policy term. So why is this important?
Claims-made insurance refresher
Claims-made policies have a per claim policy limit and an aggregate policy limit. As an example, the limits are stated as $1,000,000/$2,000,000. This translates into $1,000,000 per claim and $2,000,000 in the aggregate for the policy term. In this example, for each individual claim there is a $1,000,000 limit per reported claim. The aggregate limit caps the insurer’s obligation to $2,000,000 for all reported claims during the policy term. Every claim reported reduces the aggregate policy limit. Once the reported claims paid out exceed the aggregate limit the insurer’s obligation to the insured is fulfilled. In the given example two $1,000,000 pay outs or two thousand $1000 pay outs (2000*$1000=$2,000,000) completes the insurer obligation under the policy contract.
The Extended Reporting Period Endorsement (ERP)
Continuing this example, if the entity in question has not had any claims activity during the policy term to which the ERP is attached to the full $2,000,000 aggregate liability is available to pay claims. But what if this entity has reported claims made against it and reported during the last policy period or during the extended reporting period? Even with an ‘unlimited’ ERP the most the insurer will pay for all claims is $2,000,000. After the aggregate limit is exhausted the insurer’s obligations are fulfilled.
An ERP is purchased when entities dissolve or maybe the reason that the entity needs an ERP is because of previous claims reported to the insurer. If the insurer is non-renewing the malpractice insurance policy because of a claims issue, then sometimes purchasing the ERP may be the wrong decision.
Now assume that the insured has reported 3 claims during the last policy period. The insurer paid out $600,000 on the 1st claim, $650,000 on the 2nd claim, and $700,000 on the 3rd claim. With these 3 claims the insurer has paid in total $1,950,000 (600,000+650,000+700,000=$1,950,000) during the policy period. If the insured goes forward with purchasing the ERP there is only $50,000 (2,000,000-1,950,000=$50,000) left from the aggregate policy limit for future claims. The ERP premium may exceed the remaining aggregate limit available on the policy.
As with the ship sailing into the sunset, the ERP value vanishes into the burning sun as claims are reported and paid.
CLICK HERE FOR AN ATTORNEY MALPRACTICE QUOTE
Lee Norcross, MBA, CPCU, CPIA
Managing Director, CEO
(616) 940-1101 Ext. 7080