What is an ERP or Tail in D&O Insurance?
An ERP is short for the extended reporting period, which is also known as tail coverage and is commonly discussed around D&O, Employment Practice Liability, Professional Liability, and other management and professional policies – in fact, it’s common with all claims made type policy forms.
As a quick refresher – claims made policy form is unique from the more common occurrence policy forms you may be familiar with. A claims-made policy covers claims which are “made” or presented to the insurance company insuring you when you become aware of a claim. A claim can be a lawsuit or other formal notice that may trigger coverage under your policy.
An occurrence policy on the other hand the insurance company that responds to a claim is the policy that was in effect when the claim occurred. So as an example a slip and fall on an icy sidewalk that happened in January (even if it was 2 January ago) is reported to the insurer you had at that time.
With that out of the way let’s get to know what an ERP is.
In claims made policy if you terminate coverage either due to a change in your operations, or you’re selling your business, or you merged with another company, you won’t have coverage for claims which may be reported after you terminate coverage. What do you do?
Inside every D&O, EPLI or other claims made policy is stated what the ERP which is commonly called a tail in the insurance business will cost you based on the duration of that tail.
Here’s the important thing to understand. An extended reporting period only holds the window open to report claims which are based on an act or situation that happened before the termination of coverage. As an example, if you terminated an employee 8 months before merging your firm with another company and canceled your EPLI policy, and after that cancellation, you receive a lawsuit for wrongful termination, and you purchased an ERP, you have coverage for that claim.
Now to flip that around, let’s say you terminated your EPLI coverage on June 1st and purchased an ERP. 3 months later you receive a harassment suit that alleges that harassment took place on June 15th – there is no coverage for that claim since the act took place after the termination of coverage.
The ERP or tail only is there to provide coverage for claims reported after the termination of a claims-made coverage for acts that took place before coverage termination.
Why do you need to purchase an ERP?
In the case of a merger or consolidation or sale, the purchaser is usually going to require coverage for your prior acts that may not have yet become potential claims, so they will mandate the purchase of an ERP. In the case of retirement or business closure, you’ll want the assurance that you have protection for any claims which may arise down the road. The same is true if you change operations and no longer need an E&O or other form of professional or management liability. What we also see is when a client moves to a PEO model and the PEO provides employment practice liability, so they decide to cancel the coverage they have. In this situation, the business owner will want to purchase an ERP because the new coverage through the PEO will not cover your prior acts.
What does an ERP cost?
That depends on the insurer, but you can expect to pay anywhere between 100% to 300% of the annual premium of the policy you’re canceling. Yes, that’s steep, but if this is triggered as part of a merger or acquisition, you may get the buyer to participate in a portion of the costs.
Have other questions on D&O insurance, or on Extended Reporting ERP or Tail coverage? Why not click the button below and set up some time to chat. I promise, no high-pressure sales gimmicks or other nonsense. Just some conversation to see if we might be a good fit for you and your firm. Thanks!