An extended reporting period (ERP) is a set amount of time to report claims after an insurance policy has expired. This period is designed for professionals that need coverage for their business if they switch providers or stop offering their services.
Learn more about extended reporting periods and why your small business might need one.
What Is an Extended Reporting Period?
An extended reporting period is an extra coverage period you purchase so that you're covered in case you don't renew your professional insurance policy. The main reason for this type of coverage is to ensure that you can afford the costs associated with a claim against your business if you don't renew your professional insurance.
- Alternate definition: Extended reporting periods are also known as tail coverage or tails, because they take place at the tail-end of a coverage period.
How Does an Extended Reporting Period Work?
Professional and business insurance policies cover you if a client files a claim for a mistake they believe you have made. There are two types of professional liability policies: occurrence and claims-made.
Under an occurrence policy, the insurance company covers a claim if it happened during the period the insurer covered your business, even if the claim is made years later.
Claims-made policies cover any claims made when you're covered, but only during the period the policy is in force. For example, if you made an accounting error on a client's balance sheet, and it was significant enough to reduce their funding from investors, they could file a claim. You would only be covered by a claims-made policy if they filed the claim while your policy was "in force" or active—not a year after you switched providers or ceased offering your services.
Extended reporting periods are critical when you retire. The costs of claims against your business could drain your retirement funds.
Claims must arise from events that occur on or after the retroactive date (if one applies). Claims-made policies don't cover claims filed against your company after your coverage has ended.
For example, suppose you're insured under a one-year claims-made general liability policy that covers you annually from January 1 to December 31. When your policy expires, you replace it with a one-year occurrence policy. On April 1 of the following year, you're served with a lawsuit regarding an injury that took place the prior December 1.
Your claims-made policy doesn't cover the claim 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 on January 1.
If you had purchased an ERP when your claims-made policy expired, you would have been covered if the ERP covered April. Claims-made policies only cover claims made against your business during the policy period.
A one-way tail is coverage provided only at the insurer's option. That is, the ERP is granted only if the insurer cancels, non-renews, or rewrites your coverage under an occurrence policy. A two-way tail is an ERP that either party can elect if your policy is canceled or non-renewed by you or the provider.
Types of Extended Reporting Periods
Many claims-made policies provide both a "basic" ERP and a "supplemental" ERP. You can purchase both to extend your insurance coverage. The basic ERP takes effect the day your policy coverage ends.
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. A short-term tail may be called a basic ERP or an automatic ERP.
Some ERPs extend out to 10 years after your policy ends. However, this is a costly option, usually a multiple of the last premium you paid for active coverage.
ERPs might also include an option for a supplemental ERP. The supplemental tail takes effect when your basic ERP ends and has an unlimited duration. If you wish to purchase the supplemental ERP, you must notify your insurer in writing within 60 days after your policy expires.
Many policies include the option to purchase a long-term tail. This coverage is usually provided via an endorsement for an additional premium. A long-term tail may be called a supplemental ERP, optional ERP, discovery period, or merely an extended reporting period. Generally, this optional ERP is provided only if you request it in writing and pay the premium within a specified period, such as 60 days after the policy expires.
- ERPs give you professional insurance after you've switched policies or stopped offering your services.
- Extended reporting provisions vary widely, so it is important to understand the coverage time frames.
- There are two types of ERPs you can purchase, basic and supplemental.
- ERPs are useful on claims-made policies since coverage stops completely when the coverage period ends.