What is an Extended Reporting Period?
Many Policies Provide Two Types of Tail Coverage
Many claims-made liability policies provide an option to purchase an extended reporting period (ERP) or "tail." An ERP is a specified period of time after the policy has expired for reporting claims to the insurer.
Why You Might Need It
Claims-made policies cover claims made against your business during the policy period. 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. You should consider buying an ERP if your policy has terminated, and you are not purchasing replacement coverage.
You may also need an ERP if you replace a claims-made policy with one that applies on an occurrence basis. 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. Occurrence policies don't cover claims that result from events occurring before the policy begins or after it expires. The following example demonstrates a coverage gap that can occur if you switch from claims-made coverage to an occurrence policy.
Suppose you are insured under a one-year claims-made general liability policy that runs from January 1, 2019 to January 1, 2020. When your policy expires, you replace it with a one-year occurrence policy. On April 1, 2020, you are served with a lawsuit regarding an injury that took place on December 1, 2019. 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 on January 1, 2020.
One-Way or Two-Way Tail
An ERP may either one-way or two-way. A one-way tail is provided only at the insurer's option. That is, the ERP is afforded only if the insurer cancels or non-renews your policy, or rewrites your coverage under an occurrence policy. A two-way tail is an ERP provided if either you or your insurer elects to cancel or non-renew your policy.
Types of 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. A short-term tail may be called a Basic ERP, an Automatic ERP or some other term.
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 simply an 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.
How ERPs Work - An Example
To see how ERPs typically work consider the claims-made version of the ISO Liquor Liability Coverage Form. The latter covers damages assessed against an insured because of injury (bodily injury or property damage) for which the insured is liable by reason of selling, serving or furnishing any alcoholic beverage. To be covered, the injury must occur on or after the retroactive date and before the end of the policy. Claims must be reported as soon as practicable.
Like many claims-made policies, the liquor liability form provides both a Basic and a Supplemental ERP. One or both may apply if the existing coverage is cancelled or non-renewed. Alternatively, either or both may be provided if insurer renews or replaces the coverage with either an occurrence policy or a claims-made policy that has a later retroactive date than the one in the existing policy.
The liquor liability form provides a Basic (automatic) ERP if the policy is cancelled, non-renewed, or replaced as outlined above. It gives the policyholder five years to report claims that result from injury reported no later than 60 days after the policy ends. That is, if an injury occurs on or after the retroactive date and is reported to the insurer within 60 days after the policy expires, and the incident generates a claim, the claim should be covered if it is reported within five years.
For example, suppose you own a restaurant that is insured under a claims-made liquor liability policy that has a retroactive date of June 1, 2018. On June 30, 2019, a customer (Steve) overindulges in cocktails and becomes drunk. Steve is heading to the men's room when he lurches into another patron (Jill), knocking her to the floor. Jill suffers a seemingly minor injury, which you report to your insurer on July 15, 2019. Your claims-made liquor liability policy expires on January 1, 2020 and is replaced with an occurrence policy.
On June 15, 2020, Jill serves your business with a lawsuit for a head injury she allegedly sustained in the fall. She claims you are liable for her injury because your bartender served Steve alcohol even though he was visibly drunk. The injury occurred after the retroactive date and you reported it well before the 60 days post-expiration deadline. As the claim was made within five years of your policy expiration date, it should be covered by your Basic ERP.
The Basic ERP also provides 60 days to report claims arising from injuries not previously reported to your insurer. In the previous example, suppose that you neglected to report Jill's injury to your insurer. Jill's claim will be covered by your claims-made policy only if you are notified of her lawsuit within 60 days after your policy expires.
The claims-made liquor liability 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 your insurer will reinstate your aggregate limit. The new aggregate limit will apply only to claims reported during the Supplemental ERP.
Read ERP Provisions Carefully
Extended reporting provisions vary widely so it is important to read them carefully. Most aren't as generous as those found in the ISO liquor liability form. Few claims-made policies include an ERP that provides a new aggregate limit or an unlimited time period to report claims.