An Extended Reporting Period (ERP) is an optional coverage extension for a claims-made policy that gives the insured an additional period of time within which to report claims to the insurer arising from prior wrongful acts. Also referred to as Tail Coverage or Runoff.
Continue reading below to learn how an Extended Reporting Period works and when you might need it.
What is an Extended Reporting Period?
An Extended Reporting Period is a finite window of time beyond the end of a claims-made policy during which the insured organization may report claims to the insurer. The ERP extension only provides coverage for claims arising from wrongful acts that occurred prior to the inception of the ERP.
The ERP extension is commonly available with the following policies:
- Directors and Officers (D&O) Liability Insurance
- Errors and Omissions (E&O) Insurance and variations such as:
- Professional Liability Insurance
- Medical Malpractice Insurance
- Employment Practices Liability (EPL or EPLI) Insurance
- Media Liability Insurance
Some policies include an automatic ERP extension for 30 to 60 days. The insured may purchase longer periods for anywhere from one to six years. Once purchased, an ERP typically cannot be extended, renewed, or canceled.
The cost to purchase an ERP is commonly calculated as a multiple of the last annual policy premium, for instance, 150% of last year’s annual policy cost. The cost is often specified within the general terms and conditions of the policy with an option for multiple years.
Why purchase an Extended Reporting Period?
The ERP coverage extension gives the insured the ability to protect against loss from claims that materialize after its insurance policy is cancelled or non-renewed, such as when the insured organization is acquired, wound-down, or simply stops purchasing coverage.
A claims-made policy offers coverage for claims made against the insured during the policy period that arise from actual or alleged past wrongful acts – subject to any retroactive date or prior acts exclusion.
In situations where a policy will not or cannot be renewed this can present problems for the insured. Once a claims-made policy has expired or non-renewed, the insured no longer has any coverage. For this reason, claims-made policies may offer the option to purchase an ERP. An ERP extends the time available for reporting claims. An Extended Reporting Period may be referred to as tail coverage, discovery period, or runoff.
How does an ERP work?
Situation → Change of Control or Change in Risk
An insured may opt to convert their policy into past wrongful acts coverage only, ERP, during the policy term. This is typically done if the insured organization is wound down, acquired, or no longer wishes to have full coverage. Such events seldom occur at the point when the policy is about to expire and so, the policy needs to be endorsed mid-term from full coverage to ERP coverage only.
There are some situations in which an insurance policy will automatically convert from full coverage to ERP. These circumstances are described in the “Change of Control Provision” or “Change in Risk” wording in the policy’s Terms and Conditions. These outline situations or transactions in which ERP coverage would be automatically triggered should there be changes to the ownership structure.
Examples of such transactions include:
- The policyholder consolidates with, merges into or completes a transaction where Policyholder is no longer the parent company. For example, it sells all or substantially all of its assets to any other person or entity
- Any other person or persons, entity or entities becomes entitled to exercise more than 50% of the rights to vote at general meetings of the Policyholder
- The policyholder lists its Securities on any securities exchange (taking a private company public)
- Any company makes an offering of its securities to persons via crowdfunding
Situation → ERP at Renewal or due to Non-Renewal:
At policy renewal time the insured or the insurance company may elect not to renew the policy. The insurance company may decide the risk no longer fits its appetite or the risk has deteriorated to the point where they are no longer comfortable continuing to offer coverage.
Alternatively, the insured may decide to move to another insurance company. This could happen, for example, when a sole practitioner or professional (such as a consultant, designer, or lawyer) decides to join a larger firm.
In these situations the ERP provision gives the insured the right to extend the policy, for past acts only, for a finite period of time. This provides a way for the insured to lock in coverage for claims that may arise from past wrongful acts.
If the insured does not purchase an ERP prior to policy cancellation or nonrenewal then there would be no coverage for past wrongful acts once the policy has expired.
And remember, even with an ERP in place not everything could be covered. ERP coverage only applies to claims arising from wrongful acts that occurred prior to the ERP.
Three ERP Scenarios
Taking a D&O policy as an example, here are three common ERP scenarios.
Scenario 1: Shutting down operations
An organization decides to close its doors and shut down operations completely. It terminates all employees, stops offering professional services to clients, and the board of directors dissolves the organization. The organization at this point may decide to cancel its EPLI, D&O and E&O policies. Without an ERP extension, once all the policies are terminated the organization will be completely exposed should a claim be made in the future for something that occurred when the organization was operational. Remember, claims-made policies only respond to claims reported during the policy period. In order for the organization to have coverage for past wrongful acts, the organization must secure an ERP extension on its claims-made policies.
Example:
Company A incorporated Jan 1, 2010 and from day 1 it secured a D&O policy. On September 1, 2020 the company shut down and the company was dissolved. The CFO phoned the broker requesting a refund for the remaining 3 months on their D&O and EPL policies. The broker recommended the CFO buy tail coverage and quoted 1 year, 3 year and 6 year extension options. An ERP would cover the organization for any potential claim, as long as the claim arose from a wrongful act that occurred between Jan 1, 2010 and September 1, 2020. Claims can take time to develop and come to the surface, hence purchasing an ERP is often a wise decision.
Scenario 2: Selling the organization
An organization is acquired by a competitor. The management team and the employees transition into new roles, and the operations for the most part remain unchanged. The organizational structure and the parent company however, have changed. This is a significant and material change in risk for any insurance policy.
Unknown to the organization, the change of control or risk provision on its D&O, EPLI, E&O, and even Crime policy has been triggered. Claims-made policies typically state that:
The Insurer shall not be liable for Loss arising out of, based upon or attributable to any Wrongful Act, act, error or omission committed or Insured Event arising after the effective date of a Transaction.
This means that after the effective date of a Transaction (such a merger or acquisition), the policy automatically switches to runoff for the remainder of the policy. Coverage is now in place ONLY for wrongful acts committed prior to the transaction.
Rather than having the policy automatically go into runoff or discovery, the insured may contact their broker prior to the transactions to obtain terms for their different ERP period options, such as 1,3, or 5 years.
Scenario 3: Policy not renewed
The insured organization may also exercise an ERP option in the event that the insurance company fails to provide renewal terms, the organization elects to switch insurers or the organization does not want to renew coverage.
Example:
Company B is in distress and has failed to secure financing. The board of directors and management are evaluating alternative options and are not ready to shut down operations. Meanwhile, their D&O policy is up for renewal. The current insurer has declined to renew the policy based on the company’s financial position. Their broker has not been able to obtain alternate terms. Company B decides to exercise the ERP provision on the policy and secure runoff coverage for the 6 years. This way Company B, and it’s board of directors, have coverage for past wrongful acts.
Key Takeaways
- ERP exists as an option for the Insured and there is never any obligation to purchase;
- ERP provisions are to the benefit of the insured and should be seriously considered;
- A claims made policy will not provide protection once expired or not renewed, even if the wrongful act occurred when the policy was in place;
- Once purchased, an ERP typically cannot be extended, renewed, or canceled; and finally,
- Read your policy renewal carefully and ensure it contains an ERP provision.
