Recently, I had the opportunity to review the majority of the numerous Agents E&O policy forms (sounds exciting, doesn’t it?). First and foremost, it was very evident that “no two E&O policies are the same”. Of the many differences among the forms, there was one that probably does not get the attention that it truly deserves. The policy issue: the Optional Extended Reporting Period, commonly referred to as the “tail”.
What is the “tail” and why is it important? Typically an insurance agency would purchase a “tail” in the event that they sell the agency or just decide to close up shop. The “tail” provides a time period for which claims can be reported against the agency provided the claims arises out of wrongful acts that occurred prior to the cancellation or expiration of the policy and on or after any applicable retroactive date. In case you are wondering, there is no doubt that claims are made against agencies during this optional extended reporting period.
Among the differences among policy forms:
The length available – typically the minimum is 1 year and the maximum is either 10 years or unlimited in some cases. Some of the policies reviewed offered very limited options; actually in some cases, 1 year was the minimum and it was also the maximum. For an agency owner that sold the agency and is thus looking to protect the agency against future claims, 1 year is definitely not adequate. It is highly recommended that you look for carriers that can provide options up to 10 years.
The cost – while most of the policies provided the detail to determine the cost, not all did. Actually, some of the policies stated that the cost would be determined at the time of the request of the coverage. Not an ideal time. There is a significant cost to this coverage. For a 10 year tail, the premium is typically 200% of your last annual premium. Look for policies that clearly provide the cost upfront.
The limits – in the majority of the policies, you simply continue with the same limit that you had during the last policy period. In a few situations, the E&O carrier provided a new set of limits for the “tail”. This is a tremendous feature as once again, claims do occur during this period.
Availability – be sure you know the conditions that will allow you to secure this tail. The best scenario is that the tail is available whether you (the agency) or the carrier cancel or non-renew the policy. In some policies, if the policy was cancelled for non-payment or if the agency did not accept the renewal terms which were different than the expiring, the tail is not available. So if your agency had some claims and the carrier decided to increase the deductible, your agency would not be able to secure a tail if they refused the renewal terms.
The Optional Extended Reporting Period is a vital part of the Agents E&O protection. Your agency may not know when you will need it so be prepared and look for a policy that provides you with solid options to consider when the time is right.