As time changes, you may find yourself in the position where either you decide it is time to sell your agency, or you are on the other side and considering the purchase of an agency. In either case, something that must be considered by both the seller and the buyer is whether an ERP (extended reporting period), sometimes called “tail coverage,” should be purchased. Regardless of what you call it, the purpose is to provide coverage for errors and omissions that happen before, but the claim is made during a specified period of time period after, the date of sale/purchase.
Most, if not all, insurance agents errors and omissions professional liability policies are either “claims made” or “claims made and reported,” meaning that the claim must be made and/or reported WHILE the policy is in place. This is different than most liability policies that you are probably more familiar with, where claims are covered on an “occurrence” basis, in which case the insurance policy in place on the date of the underlying occurrence provides coverage.
The purpose of the ERP is to provide more time to report claims that could be made after the policy has expired, but still provide coverage for claims for wrongful acts that occurred during the original policy period. Let’s provide a few examples to illustrate different situations that could happen.
- An insurance agent sells her agency effective on January 1. Their E&O policy expired on December 31 in the previous year. The agent purchased an ERP that will allow her to report claims for a three-year period after December 31. The agreement provides that all policies will transfer to the buyer on January 1. On January 20, the seller receives a demand letter (or a lawsuit) from a former customer’s attorney for alleged wrongful acts that occurred in November of the prior year. Because the seller had the three-year ERP, she can report the claim/demand/lawsuit to her E&O carrier, and it would be covered subject to the terms of the policy. She would be able to report the claim and any other claim during the three-year ERP period, but only if the error or omission occurred during the policy period before the effective date of the ERP.
- An insurance agent sells his agency effective on January 1. His E&O policy expired on December 31 in the previous year. The agency did not purchase an ERP on his E&O policy. On January 20, the seller receives a demand letter (or a lawsuit) from a former customer’s attorney for alleged wrongful acts that occurred in November of the prior year. Since their policy expired on December 31 and no ERP was purchased, there would be no coverage for the claim. Note: If the claim was actually made during the original policy period, e.g., on December 31, it typically can be reported during a brief period specified in the policy – typically two to three months.
- An insurance agent sells her agency effective on January 1. Their E&O policy expired on December 31 in the previous year. The purchase agreement provides that the book of business will roll to the purchaser at renewal. There is the potential for the book to have policies that will roll over for 12 months after the purchase. During this period, the seller may still be servicing the policies that have not renewed. In this case, the selling agency needs to maintain their E&O policy until such time as all policies have rolled to the purchaser and no further servicing will be done by the seller. Once all business has moved and all of the seller’s servicing responsibilities have rolled to the buyer, the seller should purchase an ERP that becomes effective concurrent with termination of the policy. If any claims occur after the date of sale, but before all policies roll over and their E&O policy remains in place, the claims would be covered under the terms of the policy as usual. Subsequent claims for errors/omissions that occurred during the policy period would be covered pursuant to the terms of the ERP.
- Here’s the tricky one. The facts are just as in No. 1 above, but for some unknown reason, the selling agent is contacted by a former customer on February 20 (after the sale and transfer to the buyer) to take some action on behalf of the customer, which may be as simple as answering a question about coverages/limits. The selling agent takes the action requested by the customer, e.g., answers the question, but commits an error. At some later date, the customer makes a claim against the seller for the error. Because the policy expired on December 31, there would be no coverage for the claim. Why? The E&O policy itself expired on December 31. But what about the ERP? Why won’t that cover the claim? Because the policy only provides coverage for claims for wrongful acts while the policy was in place and active, and the acts occurred after the policy expired, there is no coverage for activities after that time, even though an ERP has been purchased. The ERP only provides the ability to report claims for wrongful acts while the policy was in place and active, NOT for acts after the policy has expired. Every inquiry, no matter how small or seemingly innocuous, needs to be referred to the buying agency that is now responsible for servicing that account.
Those are just a few of the potential ERP examples. Another frequent scenario is when the buyer and seller put their heads together and decide, “Hey, we can save a bunch of money if we skip the ERP and have [the buying agency] cover any claims!” Have you ever heard the phrase “penny wise and pound foolish”? That’s exactly what this is. Unless the buying agency’s E&O policy expressly accepts coverage for the selling agency’s errors and omissions, they probably will not be covered, regardless of any agreements made by them. E&O insurance carriers are not necessarily going to agree to accept those conditions. More importantly for both the seller and the buyer, that ERP cost represents the risk presented by years of possible errors & omissions that won’t come to light until after the sale. The selling agency doesn’t want to be “naked” with respect to coverage for E&O claims made after the sale, and the buying agency doesn’t want to bear the reputational and financial cost of its predecessor’s mistakes. The best bet for both parties is for the seller to purchase an ERP, the cost of which is considered in negotiations between buyer and seller.
So, back to the title: “To ERP or Not ERP, That is the Question”. The answer is:
- As long as you are actively in the insurance business, even if it is only to provide servicing of a sold book of business, you need to keep your E&O policy in place.
- When you are no longer actively in the insurance business, you should terminate your E&O policy and purchase an extended reporting period.
- What time period should the ERP cover? Ask your attorney what the applicable statute of limitations is in the state(s) where you do business, and go with the longest applicable time period.
- And after the effective date of the ERP, you should no longer provide any services to your former customers. Instead, refer them to the firm that purchased their business. That agency has E&O coverage in place for current errors and omissions. You do not.
If you do these things, then you can take time to enjoy fond memories of your former profession.
For more information about buying, selling and merging agencies, there is a great webinar on the E&O Happens website called ” Agency Risk Management Essentials: Navigating the Hazards of Buying, Selling and Merging an Agency” available to IIABA members who are also Swiss Re Corporate Solutions insureds. It provides a more in-depth discussion, more examples and additional information from industry professionals who have helped agency owners navigate these waters.
This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of the Swiss Re Group (“Swiss Re”) and/or its subsidiaries and/or management and/or shareholders.
*Richard F. Lund, JD, is a Vice President and Senior Underwriter of Swiss Re Corporate Solutions, underwriting insurance agents errors and omissions coverage. He has also been an insurance agents E&O claims counsel and has written and presented numerous E&O risk management/ loss control seminars, mock trials and articles nationwide since 1992.
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