What is an Extended Reporting Period?
Many claims-made liability policies provide an option to purchase an extended reporting period (ERP). As its name suggests, an ERP affords extra time for reporting claims to the insurer. It is often referred to as a "tail" or "tail coverage."
Why You Might Need It
Claims-made policies cover claims made against your company or any other insured during the policy period. They don't cover claims filed after your coverage has terminated. This can be problematic if your policy is cancelled or non-renewed and you do not have replacement coverage. If any claims are made against your business after your policy ends, you may have to pay them as an out-of-pocket expense.
Difficulties can also arise if you replace a claims-made policy with an occurrence policy. Occurrence policies cover claims arising from injury or damage (or some other event) that occurs during the policy period. The claim may be made during the policy period or anytime thereafter. Claims alleging injuries or damage that take place before or after the policy period aren't covered. The following example demonstrates a coverage gap that can occur if you switch from a claims-made policy to a policy that applies on an occurrence basis.
Suppose you purchase a one-year claims-made general liability policy with an inception date of June 1, 2018. Your insurer cancels your policy on March 31, 2019, and replaces it with an occurrence policy. On May 1, 2019, you receive notice that a claim has been filed against you for bodily injury that took place on September 1, 2018. The claim isn't covered by your claims-made policy because it was made after your policy ended. It isn't covered by your new occurrence policy either since the alleged injury occurred before that policy took effect.
One-Way or Two-Way Tail
Some policies provide an ERP only if the insurer cancels or non-renews your policy, or rewrites your coverage under an occurrence policy. None is provided if you (the policyholder) decide to cancel or non-renew your coverage. This type of ERP is called a one-way tail because it is provided only at the insurer's option. Other policies include a two-way tail. That is, they provide an ERP if you or your insurer elects to cancel or non-renew your policy.
Basic and Supplemental ERPs
Claims-made policies often include both short-term and long-term extended reporting periods. A short-term tail is often provided automatically if the insurer cancels or non-renews your policy. It typically lasts for 30 or 60 days after your policy expires.
Many insurers offer a long-term tail for an additional premium. This coverage is usually provided via an endorsement. A long-term tail goes by many names. Depending on the policy, it may be called a Supplemental ERP, Optional ERP, Discovery Period, or simply Extended Reporting Period. An optional ERP is generally provided only if you request it in writing and pay the premium within a specified time period, such as 60 days after the policy expires.
Example - ISO Claims-Made Policy
The claims-made version of the ISO commercial general liability (CGL) policy provides a convenient example of how ERPs may apply. The policy provides a Basic ERP and an optional (Supplemental) ERP. One or both ERPs are provided if the policy is cancelled or non-renewed. The policy doesn't specify who must cancel or non-renew so the ERPs appear to be two-way tails. One or both ERPs are also provided if the policy is replaced with an occurrence policy or with a claims-made policy that has an earlier retroactive date than the existing policy.
The claims-made CGL provides a Basic ERP automatically if the policy is cancelled, non-renewed, or replaced as outlined above. The Basic ERP lasts for five years from the end of the policy period. It gives the policyholder five years to report claims that result from an occurrence or offense that was reported to the insurer during the policy period or within 60 days thereafter. That is, if an incident occurred during the policy period, was reported to the insurer within 60 days after the policy expired, and the incident generates a claim, the claim should be covered if it is reported within the five-year extension.
For example, suppose you are insured under a claims-made CGL policy. A slip-and-fall incident occurs during the term of your policy. You report the incident to your insurer on the day it takes place. When your policy expires, your insurer replaces it with an occurrence policy. If a claim is subsequently filed against you due to the slip-and-fall incident, the claim should be covered by your Basic ERP if you report it to your insurer within five years of the date your claims-made policy expired.
The Basic ERP also provides 60 days to report claims arising from occurrences or offenses that weren't reported to your insurer during the policy period. For example, suppose that a second slip-and-fall incident occurred during the term of your claims-made policy. Unfortunately, you forgot to notify your insurer. If the second slip-and-fall incident generates a claim, that claim will be covered only if you report it to your insurer within 60 days from the date your policy expires.
The claims-made ISO form provides an option to purchase a Supplemental ERP. The Supplemental tail takes effect when your Basic ERP ends. Its duration is unlimited. If you wish to purchase the Supplemental ERP, you must notify your insurer in writing within 60 days after your policy expires.
If you purchase the Supplemental tail under the claims-made CGL, your insurer will reinstate your general aggregate limit. This means that a new General Aggregate limit will apply to claims reported during the Supplemental ERP.
Read ERP Provisions Carefully
Extended reporting provisions vary widely from one policy to another. Note unlike the CGL described above, that most claims-made policies do not provide a new aggregate limit under an extended reporting period. Moreover, few policies provide an unlimited time period to report claims. Most ERPs apply for a specified time period, such as five or ten years.