Understanding Your Professional Liability Insurance Policy
In the course of working with some of our insured lawyers, we have found that some do not understand the distinction between a “claims made” policy and an “occurrence” policy. The distinction can make all the difference in whether the lawyer has coverage for a claim or not.
Most if not all professional liability insurance policies are “claims made” policies. That means that one must have a policy in effect when the claim is reported in writing to your insurer. Most other types of liability insurance policies, such as general liability, automobile liability and homeowner’s liability, are “occurrence” policies. To have coverage under an “occurrence” based policy, the policy must have been in effect when the occurrence giving rise to the claim happened, but not necessarily when the claim was reported in writing to the insurer.
What practical difference does this make? There are at least three situations in which the distinction can affect a lawyer:
THE LAPSED POLICY
Sometimes a lawyer will allow his policy to expire. Some months later, either he may come back to his prior insurer or he may go to another insurer. In both cases, the insurer will likely give the lawyer a “prior acts limitation endorsement” (PALE) date that is identical to the date the new policy takes effect. This means that the lawyer has coverage for acts or omissions occurring after the PALE date, but not before. So if the insured reports a claim to the insurer during the policy period, but the act or omission giving rise to the claim occurred before the policy came into effect, i.e., before the PALE date, the policy will not offer coverage for that claim.
MOVING TO ANOTHER FIRM
If a lawyer changes firms, a different insurer may insure the new firm. The new insurer will likely give the lawyer a PALE date that is identical to the date the lawyer is added to the policy. If a claim is reported to the insurer during the policy period, but the act or omission giving rise to the claim occurred when the lawyer was with the old firm, i.e., before the PALE date on the new policy, the new policy will not provide coverage for the claim. The previous policy will not provide coverage even though the act or omission occurred during the policy period for that policy because the policy will not be in effect at the time the claim is reported.
RETIRING LAWYER
We all hope to retire someday. When that day comes, we might consider just letting our malpractice policy expire. Problem is, if a claim is reported to the insurer after the policy has expired, even though the claim arises from an act or omission committed during the policy period, the policy will not provide coverage. Again, this is because the policy will not be in force when the claim is reported to the insurer.
WHAT CAN ONE DO TO ADDRESS THESE PROBLEMS?
Either the “prior acts date,” or an “Extended Reporting Endorsement,” commonly called a “tail policy”, can address these issues.
An Extended Reporting Endorsement (ERE) is an endorsement to an expired policy that simply extends the time in which a claim can be reported to the insurer for coverage. For example, a retiring lawyer, or a lawyer moving out of private practice and cancelling his policy, will want to consider purchasing an ERE to extend the time in which a claim can be reported to the insurer for coverage. This is not a “new” policy, so the act or omission that gives rise to the claim must still have occurred during the policy period of the policy to which the ERE attaches.
In North Carolina, the statute of limitations for legal malpractice claims is three years from the act or omission giving rise to the claim, so that might be a good choice for the length of the ERE. An even better choice might be four years from the date of the act or omission. The statute of repose for legal malpractice claims is four years from the date of the act or omission. Using the statute of repose as the duration for an ERE helps eliminate uncertainty about when the cause of action accrued for purposes of measuring the statute of limitations. (For more on this, refer to N.C.G.S. 1-15(c), North Carolina’s statute of limitations for professional liability claims.) There are some exceptions to these general propositions, such as in tax cases. The best course of action is to discuss your particular needs regarding an ERE with your insurer before you buy.
A lawyer moving to another firm can buy an ERE that attaches to her previous policy, or she may be able to get the new insurer to give her a PALE date far enough back to cover acts or omissions on which the statute of limitations or statute of repose has not yet run.
In summary, lawyers should have a good understanding of a “claims made” policy, an ERE and a PALE date to make sure changes in their coverage status do not leave them exposed to uncovered malpractice claims.
