We have discussed a number of issues with Extended Reporting Period Endorsements (ERP or Tail) recently. One that does not come up often is the remaining ERP policy limit. Remember that an ERP is attached to the last inforce policy. The ERP does not change the terms of the policy or reinstate limits that may have been used during this policy term.
A little background claims-made insurance 101
Most focus when purchasing coverage on the liability policy limits. Almost all of the attention is on the per claim limit. Most insurers 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 $1,000,000 to pay the reported claim. The aggregate limit means that the insurer is only obligated to pay up to $2,000,000 for all claims that have been reported during this policy term. Every claim reported is assigned a policy term that is used to reduce the aggregate policy limit. Once the reported claims paid out exceed the aggregate limit then the insurer’s obligation to the insured is fulfilled. In the example given this could be two $1,000,000 pay outs or two thousand $1000 pay outs (2000*$1000=$2,000,000).
Impact on Extended Reporting Period Endorsement (ERP)
Continuing with this example, if the entity in question has not had any claims activity during the policy term that the ERP was attached to the full $2,000,000 aggregate liability is still available to pay claims. But what if this entity has many claims made against it and reported during the ERP. Even with an ‘unlimited’ ERP the most the insurer will pay on all of these claims will be $2,000,000. After the aggregate limit is exhausted the insurer’s obligations have been fulfilled.
An ERP is purchased when entities dissolve or sometimes the reason that the entity needs an ERP is because of previous claims reported to the insurer. The insurer maybe non-renewing the malpractice insurance policy and no other insurer is willing to write the entity with a prior acts endorsement; or the cost of getting new insurance with prior acts is many times the expiring premium. But sometimes purchasing the ERP is 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. So for these 3 claims the insurer has paid in the aggregate $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 in the aggregate policy limit to pay future claims. In some cases the cost of the ERP may exceed the remaining limit available on the policy.
As with the ship sailing into the sunset, the ERP value disappears.