“Tail Coverage” – Understanding The Extended Reporting Period

Pamela G. Michiels | Phelps Dunbar

Professional liability policies, almost always written on a claims-made basis, typically contain a number of options for the insured to obtain an Extended Reporting Period (ERP). What does that mean? And why might it be necessary, or at least a good idea? While many variations on the ERP exist, the basic purpose, function and operation of the ERP are fairly standard. Here’s what you should know.  

The ERP, also known as “tail coverage,” provides for an additional period of time during which the insured can report a claim after its claims-made policy has expired. That’s important, because the policy itself typically provides that the claim must be first made against the insured, and reported to the insurer, during the policy period. Tail coverage typically isn’t necessary if the insured is renewing its coverage, but it can be invaluable where that’s not the case. 

  • Some policies provide a limited “automatic” ERP to allow the insured a grace period, usually 30 to 60 days, to report a claim that was made during the policy period.This typically costs the insured nothing. 
  • If an insured’s policy is cancelled or non-renewed by the insurer, or the insured elects to cease carrying professional liability coverage, an “optional” ERP is available at an additional cost to the insured. The cost is usually based on a multiple of the premium on the cancelled or expiring policy. Such tail coverage is typically purchased in one-year increments, up to five years, and sometimes longer – but as the tail grows, the cost goes up, since the insurer is taking on additional risk.
  • Typically, the only instance in which an ERP will not be offered is where the policy has been cancelled for cause – nonpayment of premium, fraud or material misrepresentation.
  • Some ERPs extend the time during which a claim that was first made during the policy period can be reported.Other ERPs allow for the extension of coverage where the claim was both first made against the insured and reported to the insurer during the ERP, as long as the wrongful act giving rise to the claim took place after the retroactive date and prior to the end of the original policy period. 
  • The ERP does not extend the policy period, and does not change the scope of coverage or increase the policy’s available limits.
  • A common reason to obtain tail coverage is where an insured is winding up its business – due to retirement, sale or unprofitability, for example. While there’s no need to maintain professional liability coverage on a shuttered business, the insured will want to maintain some protection against wrongful acts it may have committed prior to the policy’s expiration, but a claim has not arisen and thus cannot be reported until after the policy has expired.
  • An ERP is always optional, and an insured is never required to purchase one. However, the ERP provides a great deal of additional protection and should be seriously considered, especially if the insured foresees a major change to its business or its insurance program.

The Retroactive Date – When Timing is Everything

Mary Frances Lindquist Rasamond | Phelps Dunbar

Most architects, engineers and contractors’ professional liability policies are written on a claims-made basis, requiring a claim to be first made against the insured and reported to the insurer during the policy period. Claims-made policies typically contain a retroactive date limitation, which must be satisfied for the policy to provide coverage. What is a retroactive date, and how does it impact potential coverage?

What Is a Retroactive Date?

  • A retroactive date dictates when an insured’s error or omission giving rise to a claim can take place – on or after the retroactive date, which is typically listed in the policy’s declarations. Some policies also may contain language prohibiting coverage of claims arising from continuous acts or a series of related acts if those acts first commenced prior to the retroactive date.
  • The retroactive date limitation (the provision precluding coverage for claims arising out of acts, errors or omissions prior to the retroactive date) can be found in a policy’s insuring agreement or in an exclusion or endorsement to a claims-made policy.
  • The retroactive date is typically based on the date from which the insured has had (uninterrupted) professional liability coverage.
  • Retroactive dates often pre-date the policy’s inception, potentially providing coverage for claims that arise from acts or omissions taking place prior to the policy’s inception date. A retroactive date that’s the same as the policy’s inception requires that the act or omission giving rise to the claim take place during the policy period (in addition to the claim being first made against the insured and reported to the insurer during the policy period). Claims-made policies with no retroactive date provide full prior acts coverage – the timing of the act or omission is not relevant for coverage purposes.

How Does a Retroactive Date Impact Potential Coverage?

  • Professional liability claims may not be asserted until years after the insured’s alleged error or omission. The retroactive date provides some limitation on how far back the insurer will provide coverage for the insured’s errors. For example, a claim arising from design errors allegedly made by an architect prior to the retroactive date would not be covered under a claims-made policy even if the claim was first made and reported during the policy period.
  • Courts in the majority of jurisdictions find that a claims-made policy’s retroactive date limitation is unambiguous and enforceable as written. However, New Jersey’s highest court has held that a claims-made policy providing no “prior acts” coverage (that is, the retroactive date is the policy’s inception date) violates public policy if there is an objectively reasonable expectation of coverage under the circumstances.
  • Retroactive dates may create a gap in coverage unless renewal policies and policies placed with a new insurer provide the same retroactive date. A gap in coverage also may arise if an insured shifts from a claims-made policy to an occurrence-based policy (which requires that the injury or damage take place during the policy period). Under these circumstances, an insured should consider purchasing tail coverage or an Extended Reporting Period under its expiring claims-made policy, which may close any coverage gap.
  • An insured should fully understand the significance of the retroactive date when purchasing claims-made coverage. Insurers should clearly communicate to the insured the basis for the retroactive date (and its ramifications).

Who (Else) is Covered Under Your Professional Liability Policy?

Sarah Nau | Phelps Dunbar

When does a Professional Liability policy cover individuals that work for an insured, an insured’s related entities (such as subsidiaries), and/or the insured’s contracting partners?

  • Individuals working for an insured and an insured’s related entities are not always automatically covered, meaning review of the policy’s Declarations and/or definition of “insured” is crucial.
  • Professional Liability policies do not typically provide coverage for an insured’s contracting partners, but an insured may accomplish this by requesting coverage via endorsement for a risk-transfer obligation (such as an agreement to defend and indemnify) between the insured and its contracting partner, or (albeit rarer in the Professional Liability context) naming the contracting partner as an additional insured.

How are an insured’s related individuals and entities covered under a Professional Liability policy?

  • The first named insured is listed on the Declarations page. An insured may also request that other related entities be scheduled as named insureds. Typically, this is accomplished by attaching an endorsement to the policy that lists these entities as named insureds in addition to the first named insured. The policy’s definition of “insured” may also include an insured’s subsidiaries and other related entities.
  • With respect to individuals who work for the insured, it is very common for past and present employees, partners, members, officers and directors to be included in the definition of “insured,” with the caveat that those individuals’ liability must arise from work performed for the insured.
  • Automatic insured status for an independent contractor performing work on behalf of the insured is uncommon. While some “insured” definitions include these independent contractors, many do not—and will not—unless the policy is specifically endorsed to cover them.

How are an insured’s contracting partners covered under a Professional Liability policy?

  • In General Liability policies, a subcontractor’s policy commonly includes additional insured endorsements, under which a general contractor will be covered as an additional insured if: (1) the subcontractor agreed in writing to name the general contractor as an additional insured and/or the general contractor is specifically scheduled as an additional insured; and (2) the general contractor’s liability arises out of the subcontractor’s work. An additional insured has all of the same rights under the policy as any other insured.
  • Conversely, Professional Liability policies rarely have additional insured provisions, and especially not “blanket” ones. Thus, if an insured professional contracts with an owner, general contractor or developer on a project, one cannot assume that those entities will receive coverage under the insured’s Professional Liability policy. In part, this is because, given the specific nature of a professional risk, those underwriting such a policy are unable to extend coverage to an entity whose risk exposure is unknown to them.   
  • Most Professional Liability policies exclude from coverage liability assumed by the insured under contract (including hold harmless and indemnity agreements) unless the insured would have been liable in the absence of the contract. While also uncommon, some Professional Liability policies will provide coverage for an insured’s contractual agreement to defend/indemnify a contracting partner if the contracting partner is sued; that would typically be accomplished by endorsement. 
  • Before determining whether a policy provides coverage for any risk-transfer provision, an insured must confirm whether the risk-transfer provision is valid. Many states have rules prohibiting an insured from agreeing to defend and indemnify a contracting partner for claims arising out of the partner’s own negligence unless the agreement to do so is sufficiently clear and conspicuous. Some states also have statutes prohibiting risk-transfer provisions entirely (a common example is anti-indemnity statutes for the oil and gas industry). Thus, careful review of a state’s laws regarding risk-transfer provisions is important before determining whether the policy may potentially cover the risk transfer.

Seventh Circuit Holds “Breach of Contract” Exclusion in Professional Liability Policy Renders Coverage Illusory

Jason Taylor | Traub Lieberman Straus & Shrewsberry | October 2, 2019

Most professional liability policies include a “breach of contract” exclusion precluding coverage for claims or damages arising out of breach of contract. How to apply such broad exclusions to claims brought by clients of the insured (or others with whom the insured has contracted) can be difficult because most professional relationships necessarily involve an underlying contract. On the one hand, arguably every claim against an insured professional “arises out of” the contract where but for the contract there would be no relationship between the claimant and insured. That interpretation of the exclusion, however, is seemingly too broad. But, what about claims that could be brought in both contract and tort? Or, does the exclusion limit coverage only to claims brought by third parties with whom the insured has not contract? Just as “breach of contract” exclusions vary, courts are mixed.

In Crum & Forster Specialty Insurance Company v. DVO, Inc., 2019 WL 4594229 (7th Cir. Sept. 23, 2019), the Seventh Circuit addressed whether the E&O coverage of the primary and excess insurance policies issued to DVO cover a state court claim for contract violations in light of the policies’ broad “breach of contract” exclusion. In applying Wisconsin law, the Seventh Circuit found that the language in the “breach of contract” made the exclusion broader than the grant of coverage, and therefore, rendered coverage illusory.

In DVO, Inc., the underlying contract claim was brought by WTE pursuant to Standard Form Agreement under which DVO agreed to design and build an anaerobic digester for WTE to be used to generate electricity from cow manure which would then be sold to the electric power utility. WTE sued DVO for breach of contract alleging that DVO failed to fulfill its design duties, responsibilities, and obligations under the contract in that it did not properly design substantial portions of the structural, mechanical, and operational systems of the digester, resulting in substantial damages to WTE. WTE sought over $2 million in damages and fees.

Crum & Forster initially offered a defense under primary and excess policies providing a combination of commercial general liability, pollution liability, E&O and other coverages. The issue on appeal concerned the E&O coverage, and more specifically, whether the policies’ “breach of contract” exclusion barred coverage. The exclusion precluded coverage for damages and costs “based upon or arising out of: breach of contract, whether express or oral, nor any ‘claim’ for breach of an implied in law or an implied in fact contract[]….” DVO argued that the “breach of contract” exclusion was so broad as to render the E&O professional liability coverage illusory, and therefore, could not be enforced to preclude a duty to defend. The District Court held that the professional liability coverage was not illusory because it would still apply to third party claims, and even if it was, the remedy would be to reform the contract to allow coverage for third party claims against the insured, not to allow coverage for all professional liability claims. The Seventh Circuit reversed.

The Seventh Circuit began its analysis with familiar tenants of Wisconsin insurance law. First, a determination of whether the exclusion applies must focus on the incident that allegedly gave rise to the coverage, not the theory of liability. See e.g., 1325 North Van BurenLLC v. T-3 Group, Ltd. (noting that claims of negligence in the failure to provide competent professional services could raise both tort and contract claims). Therefore, according to the Court, even a claim that purports to be a tort claim can be excluded under the “breach of contract” exclusion if it arises out of that contract.

Second, the Seventh Circuit reiterated that the “arising out of” language, even in an exclusion, is broadly construed. The phrase is broad, general, and comprehensive, and it is ordinarily understood to mean “originating from, growing out of, or flowing from.” Therefore, under Wisconsin law, “the term ‘arising out of’ is interpreted broadly to reach any conduct that has at least some causal relationship between the injury and the event not covered, which sweeps in third-party claims as well when so related.” DVO, Inc., 2019 WL 4594229 at *8.

In DVO, Inc., the underlying state court complaint alleged that DVO was contracted to design and construct the anaerobic digester and, because of its faulty design, damages were incurred. As such, the complaint alleged a claim that arose out of the contract, and therefore, fell within the exclusion language. According to the Seventh Circuit, the “event not covered” in the policy was itself quite expansive, explicitly applying “breach of contract” to all contracts whether express or oral, and even including contracts implied in law or fact. The Seventh Circuit rejected the District Court’s attempt to distinguish between direct claims between contracting parties based on the contract, and third-party claims based on the insured’s failure to exercise reasonable professional care where the claimant has no contractual relationship with the insured. While the Seventh Circuit conceded that more tailored language may support the District Court’s reasoning, the “breach of contract” exclusion at issue was extremely broad: it included claims “based upon or arising out of” the contract, thus including a class of claims more expansive than those based solely upon the contract. Given that broad language, the exclusion would include even the claims of third parties. As to those third parties, the claims of professional negligence against DVO fell within the “breach of contract” exclusion because they necessarily “arose out of” the express, oral, or implied contract under which DVO rendered professional services on the project.

Based on the above analysis, the Seventh Circuit reasoned that the “breach of contract” exclusion rendered the professional liability coverage in the E&O policy illusory. In the insurance context, “[i]llusory policy language defines coverage in a manner that coverage will never actually be triggered.” Id. *6. While the Seventh Circuit recognized that if the purported coverage in a policy proves to be illusory a court may reform the policy to meet the insured’s reasonable expectation of coverage, the Court disagreed with the District Court’s attempt to reform the contract. The District Court reasoned that even if the coverage was illusory, the remedy would be reform the contract to allow coverage for third party claims (and not those brought directly by parties with whom the insured contracted). The Seventh Circuit, however, held that the District Court’s focus on the hypothetical third-party action was misplaced. Rather, the focus should be on the “reasonable expectation” of coverage of the insured in securing the policy. Although the Seventh Circuit’s analysis of hypothetical third-party claims under the “breach of contract” exclusion might foreshadow the likely outcome in this case, ultimately the Seventh Circuit declined making a determination on the reasonable expectations of the insured and remanded the case back to the District Court to consider.

Successful Assertion of a Professional Liability Claim

Michael L. Meyer | Taft Stettinius & Hollister LLP | July 25, 2018

Perhaps you are a general contractor whose project has suffered a catastrophic failure due to a problem with an engineer’s calculations. Maybe you are an owner and you have just learned your new building sits partially on adjacent property due to an error by the surveyor. Or possibly you are a construction manager accused of mishandling safety governance, leading to an injury on the job site. These are just some of the many ways in which the players in construction projects may interface with professional liability. Understanding professional liability and how it can impact your business operations is a critical risk management tool.

A professional liability claim is a claim that involves a mistake in a technical or highly skilled area of a project. In construction “professional” service providers can include architects, engineers, land surveyors, construction managers, and others performing services that require advanced skill or professional training. Often, but not always, professional services are those performed by individuals that must be licensed by a state or governing board. Whether or not an act is that of a “professional” service provider is based on the nature of the work performed, not the performer’s title.

There are two important distinctions that make a claim of professional liability different from other claims. The first involves what a plaintiff must prove in order to win his or her case. The second is how professional liability claims are covered by insurance. Whatever your role on a project, a basic understanding of these variables is important.

Most commercial property owners have experienced a claim for premises liability. A typical case may involve a patron who files a lawsuit after being injured while on the property. To win, the patron must prove that the owner owed a legal duty to keep the premises safe, and failed to do so, causing an injury. The same basic elements apply to a professional liability claim, with one critical difference. An expert’s opinion is required to establish whether the “professional” failed in carrying out his or her legal duty.

In the basic premises liability case a defendant is held to the standard of care of a reasonable person under the circumstances. In a professional liability case, however, the standard of care is that of a reasonable member of the profession. In other words, a plaintiff claiming an engineer’s negligence must prove that the engineer’s conduct fell below the standard of care for a typical engineer. To establish that standard, a plaintiff must rely on expert testimony. Establishing the appropriate standard of care and demonstrating a violation could require many hours of work by the expert. This translates into significant expense for a plaintiff… an expense that is often not recoverable in the lawsuit.

In addition to considerations about the cost, a potential plaintiff must also be concerned about the availability of the professional’s insurance to cover that claim. Likewise, a professional service provider must understand the scope of their insurance, including those claims that are not covered. Policies contain numerous exclusions and exceptions that can take a claim out of the scope of coverage. If the claim is large, this could result in the professional being unable to satisfy a judgment.

Many insurance policies define professional services to limit the type of services to which the insurance applies. An architect or engineer may perform a variety of tasks as part of his or her engagement on a project. But tasks that do not require any specialized knowledge or advanced training may not qualify for coverage under a professional liability policy. For example, an engineer’s miscalculation of wind tolerances, leading to a partial collapse of a building during a storm, may qualify as negligence in performing professional services. By contrast, an engineer’s failure to supervise on-site movement of materials, leading to a personal injury when two trucks collide does not require a professional degree or designation. It is not likely to qualify as professional negligence.

Another consideration for both plaintiffs and professional service providers is the coverage period of the policy. Many general liability policies are “occurrence” policies, meaning they cover losses that occur during the policy period. By contract, professional liability policies are often “claims made” polices covering only claims actually made during the policy period. If a potential plaintiff waits too long to make a claim, they may find that professional no longer has coverage. An example would be where a professional service provider ceased operations years earlier.

Yet another consideration is the eroding or “wasting” limits of a professional liability policy. Unlike general commercial liability policies, a professional services policy often includes the cost of defense of the lawsuit in the overall policy limits. This means that the cost of the professional’s attorney fees to defend the case reduces the overall amount of insurance available to pay a judgment against the professional.

Understanding how a professional liability claim differs from a general negligence claim, and how it is covered differently by insurance, is critical to successfully defending or prosecuting such a claim. In short, professional liability claims are often more difficult to prove. Insurance coverage is available, but subject to certain limitations that narrow coverage.