Non-Practicing Extensions in Professional Liability Insurance Policies
Robert Bregman | November 1, 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.
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.
| On January 1, 2002, a surgeon decides to retire. | ||||
|---|---|---|---|---|
| Insurance Coverage History: | From January 1, 1992 until January 1, 2002, the surgeon had purchased professional liability coverage from insurer A, by means of a series of 1-year policies that incepted on January 1, 2002, the date on which she retired. | |||
| Claim Scenario: | On March 1, 2003, the surgeon is served with a summons. A patient on whom the surgeon operated, alleges that on October 1, 2000, the surgeon negligently performed an operation that caused the patient permanent injuries. | |||
| Insurance Coverage Analysis: | In the absence of having continued to purchase professional liability coverage, the surgeon would be uninsured for the claim, as illustrated below. | |||
| X | Operation Performed | X | Last Policy Terminates | Claim Made |
| 1/1/92 | 10/1/00 | 1/1/01 | 1/1/02 | 3/1/03 |
| Is the claim covered without ERP? | The claim is uninsured because no coverage was in force on the date the claim was made (March 1, 2003). The surgeon's last policy terminated on January 1, 2002, the date on which she retired. | |||
| Is the claim covered with an ERP? | An extended reporting provision would have allowed the surgeon to report the claim to insurer A and receive coverage for the claim because the act that gave rise to the claim took place on October 1, 2001, while the surgeon's January 1, 2001-2002 policy with insurer A was still in force. | |||
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:
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:
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 |
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.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
