Non-Practicing Extensions in Professional Liability Insurance Policies
November 2002
Liability claims can be made against insureds
even after they cease to practice their professions. Robert Bregman discusses
the importance of non-practicing extensions in professional liability insurance
policies.
by Robert A. Bregman
IRMI
Non-practicing extensions are one of the most often overlooked, yet important
provisions found within professional liability insurance policy forms. This
article will answer four key questions associated with such provisions: (1)
When do they apply? (2) Why are they necessary? (3) Where are they found? (4)
What do they cover?
When Do They Apply?
Non-practicing extensions provide extended reporting periods under claims-made
professional liability policies—for no charge and for an unlimited duration—under
three circumstances as follows.
- When an insured dies.
- When an insured retires.
- When an insured becomes permanently disabled.
An extended reporting provision (ERP) in a claims-made policy allows an insured
to report a claim(s) to an insurer after a policy has terminated, provided the
claim(s) was the result of an act that took place while the policy was in force.
(In addition, under some, but not all ERP provisions, the insured is permitted
to report "incidents" to the insurer that have the potential to produce claims
in the future. This topic was addressed in another IRMI.com article entitled
"Does the Discovery Provision Apply During the Extended Reporting Period?")
Why Are They Necessary?
If an insured has had professional liability coverage written on a claims-made
basis throughout the course of his or her career, it will be necessary to continue
coverage even after he or she is no longer practicing. This is because under
claims-made policies, for coverage to apply, a policy must be in force on the
date when a claim is made against the insured. Given the long-tail nature of
claims against professionals, it is not uncommon for claims to be made many
years after the allegedly wrongful act took place. Accordingly, even if a professional
ceases to practice, he or she must continue purchasing coverage to avoid gaps
because claims are often made many years after an act has taken place. Figure
1 illustrates this concept.
Figure
1
One-year extended reporting periods are generally priced at 75 percent to
150 percent of the expiring annual premium. Extended reporting periods of longer
duration are of course, more expensive. For example, Great American Insurance
Company (whose lawyers professional liability policy is quoted in Figure 2,
below) charges 185 percent of the expiring premium for a 2-year ERP, 225 percent
for a 5-year ERP, and 300 percent for an ERP of unlimited duration. Indeed,
given such prices, it is apparent that the cost-free nature of ERPs made available
by means of non-practicing extensions confer a substantial benefit upon insured
professionals.
Where Are They Found?
Nearly all non-practicing extensions are contained within four lines of professional
liability insurance. Specifically, those written for:
- Physicians
- Attorneys
- Accountants
- Architects & Engineers
Although non-practicing extension provisions are found within the forms written
for a few other professions, the vast majority of such provisions are offered
by insurers writing these four lines of coverage.
What Do They Cover?
As noted above, non-practicing extensions in professional liability policies
provide ERP coverage at no cost—and for an unlimited
duration—in the event that an insured dies, retires, or becomes permanently
disabled.
Retirement Coverage. Such coverage applies
under two conditions. First, the insured must have reached a specific minimum
age, generally 55, but under some insurers’ forms the minimum age requirement
is 60. Second, the insured must have been a policyholder with this particular
insurer for at least the 5 previous years.
Permanent Disability. It is advantageous if
a policy's definition of "disability" is as liberal as possible. For instance,
some insurers define disability as the inability to perform any duty pertaining
to the practice of the profession covered under the policy. In contrast, others
insurers’ forms consider a professional disabled if he or she can no longer
perform a chosen specialty, a definition that is preferable. Thus, under the
former definition, a surgeon whose hand was partially paralyzed would not be
disabled because he or she could still teach in a medical school, whereas under
the latter definition, disability would indeed apply because he or she would
no longer be able to perform surgical operations.
A representative non-practicing extension appears in Figure 2. Note that
the policy's definition of "disability" is also a favorable one for the insured,
because the inability to engage in the practice of law—rather than in the insured's
legal specialty—is considered "disability" for the purposes of eligibility for
liberalized ERP coverage.
c. Individual
Retiree Option. Upon the retirement from the practice of law,
any lawyer who qualifies as an Insured shall be entitled to an Extended
Claims Reporting Endorsement with an unlimited reporting period at no
additional premium. An Insured’s right to the insurance of such an endorsement
is conditioned on the following:
- the Insured is at least fifty-five (55) years of age at the
time of retirement;
- the Insured was employed by the Named Insured during the Policy
Period and had been insured by us for five or more consecutive Policy
Periods;
- the Insured notifies us of his or her retirement and requests
the issuance of an Extended Claims Reporting Endorsement within
thirty (30) days following the cancellation, nonrenewal or expiration
of this policy; and
- the conditions described above in Subsection 11.a. have been
met.
d. Individual Death or Permanent Disability
Option. Any lawyer who qualifies as an insured and who dies or
becomes permanently disabled, shall be entitled to an Extended Claims
Reporting Endorsement with an unlimited reporting period at no additional
premium. Such Insured’s right to the issuance of an Extended Claims
Reporting Endorsement is conditioned on the following:
- the Insured was employed by the Named Insured during the Policy
Period and suffered death or disability during the Policy Period;
- in the event of disability, the Insured is totally and continuously
disabled from the practice of law a minimum of six months prior
to the election of this option;
- satisfactory written evidence of death or permanent disability
is provided to us within ninety (90) days following the death or
disability;
- The Insured or Insured’s representative notifies us of the death
or disability and requests issuance of an Extended Claims Reporting
Endorsement within thirty (30) days following the cancellation,
nonrenewal or expiration of this policy; and (5) The conditions
described above in Subsection 11.a. have been met.
NOTE: Subsection 11.a. enumerates the
provisions of a standard extended reporting period (ERP) endorsement,
which extends the period during which claims may be reported under the
policy.
Source: Great American Insurance
Companies; Legal Professional Liability Claims-Made Form; CG 80 42 (Ed.
03/97) XS
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Concluding Thoughts
Non-practicing extensions are important considerations, especially when choosing
between professional liability policies written for physicians, attorneys, accountants,
and architects & engineers. This is especially true when an insured is contemplating
retirement within the near future. And even if retirement is not in the immediate
offing, the benefit that accrues in the event of unforeseen death or disability
is similarly meaningful.
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