Many people are not fully aware of the mechanics of just how most professional liability policies are written. Back in the mid-eighties, insurance companies and professionals were struggling with the costs of how to price and how to pay for these expensive policies that were only getting more and more expensive. So the industry developed a claims made policy with the rational that an insured would be covered for work performed while insured and would be given the option to purchase the ability to report a claim after the policy was terminated. This allowed insurance carriers the ability not to have to charge up to 50% more in premiums each year to set aside in a contingency fund, to pay for claims that could develop later, after the policy terminated. In some instance, they had to keep this contingency fund as long as they were a viable insurance carrier to cover over all past work ever performed.
The result is what is now called “tail” coverage. This is somewhat of a misnomer and really should be called “nose” coverage. The idea is, once the policy is terminated for whatever reason, the insured can purchase a period of time into the future, from which to report a claim for work performed from the prior-acts date until policy termination. Prior-acts is that period of time that the policy covers the insured for past work performed and is usually noted on the policy declarations page or by an endorsement and should be heavily protected as the most important aspect of your coverage.
These policies typically allow the insured to change the terms of the policy (i.e., limits, deductibles, other optional coverages) from year to year. However, the insured must understand that, by doing so, this will become retro-active back to the original prior-acts date. So, as an example, if you increase your limits at the policy renewal, any claim walking through the door thereafter, is covered at the newly changed limit amount. What insured’s must be aware of, is that carriers are more concerned about what you have done in the past, than what you are doing right now. That is because an insured’s exposure develops over time from when the work was performed. Insured’s are most likely to experience claims several years after their work has been performed. Therefore, as an insured, it is best to ask yourself, before changing any terms on your policy, “do I have any work from the past three to five years that could affect my decision in changing the terms?” If enough time has passed from when you rendered the services, then you should consider proceeding. Each situation is different, but this is key in making any changes to your coverage.
Please contact Paul Morris for information on our Accountant's and Law programs for Professional Liability Coverage at (415)883-2525.