The Ins and Outs of Tail Coverage
By Mark Bassingthwaighte
To this day, I still get the occasional call from an attorney wanting
to know how to go about purchasing a tail policy, and my response
is always the same. I need to make sure the caller understands there
really is no such thing as a tail “policy.” Clarification on this point
is important because confusion over what a tail is and isn’t can have
serious repercussions down the road. To make sure you don’t end up
running with any similar misperceptions, here’s what you need to
know.
An attorney leaving the practice of law can’t purchase a malpractice
insurance policy because he or she will no longer be actively
practicing law. There simply is no practice to insure. This is why an
attorney can’t buy a tail “policy.” What you are actually purchasing
when you buy a tail is an extended reporting endorsement (ERE).
This endorsement attaches to the final policy that is in force at the
time of your departure from the practice of law. In short, purchasing
an ERE, which is commonly referred to as tail coverage, provides an
attorney the right to report claims to the insurer after the final policy
has expired or been cancelled.
Again, under most ERE provisions, the purchase of this endorsement
is not one of additional coverage or of a separate and distinct policy.
The significance of this is that under an ERE, there would be no
coverage available for any act, error, or omission that occurs during
the time the ERE is in effect. So, for example, if a claim were to
arise several years post retirement out of work done in retirement
as a favor for a friend, there would be no coverage for that claim
under the ERE. This is why you hear risk managers say things like
never write a will for someone while in retirement. I know it can
be tempting, but don’t practice a little law on the side in retirement
because your tail coverage will not cover any of that work.
Another often misunderstood aspect of tail coverage arises when
an attorney semi-retires and makes a decision to purchase a policy
with reduced limits in order to save a little money during the last
few years of practice. The problem with this decision is insurance
companies will not allow attorneys to bump up policy limits on the
eve of a full retirement, again, because no new policy will be issued.
For many attorneys, this means the premium savings that came with
the reduced limits on the final policy or two will turn out not to have
been worth it and here’s why. All claims reported under the ERE will
be subject to the available remaining limits of the final policy that
was in force at retirement, and this may not be enough coverage.
By way of example, if you were to reduce your coverage limits from
one million per occurrence/three million aggregate to five hundred
thousand per occurrence/five hundred thousand aggregate during the
last year or two of active practice in order to save a little money, you
will only have coverage of five hundred thousand per occurrence/five
hundred thousand aggregate available to you for all of your retirement
years, assuming there was no loss payout under that final policy. In
terms of peace of mind, for many that would be an insufficient amount
of coverage. Therefore, if you anticipate wanting those higher limits
of one million/three million during your retirement years, keep those
limits in place heading into retirement.
Unfortunately, while many attorneys hope to obtain an ERE at the
end of their career, the availability of tail coverage isn’t necessarily
a given. For example, most insurers prohibit any insured individual
from purchasing tail coverage when an existing policy is canceled
for nonpayment of premium or if the insured failed to reimburse
the insurance company for deductible amounts paid on prior claims.
An attorney’s failure to comply with the terms and conditions of the
policy; the suspension, revocation, or surrender of an insured’s license
to practice law; and an insured’s decision to cancel the policy or allow
coverage to lapse may also create an availability problem.
An attorney’s practice setting is also relevant. Particularly for retiring
solo practitioners, insurers frequently provide tail coverage at no
additional cost to the insured if the attorney has been continuously
insured with the same insurer for a stated number of years. Given that
tail coverage can be quite expensive, shopping around for the cheapest
insurance rates in the later years of one’s practice isn’t a good idea,
as the opportunity to obtain a free tail could be lost. Review policy
provisions or talk with your carrier well in advance of contemplating
retirement in order not to unintentionally lose this valuable benefit.
The situation for an attorney who has been in practice at a multi-
member firm is a bit different. Here, when an attorney wishes to retire,
leave the profession, or is considering a lateral move and worried
about the stability of the about-to-be-departed firm, some insurance
companies will not offer an opportunity to purchase an ERE due to
policy provisions. The reason is the firm’s existing policy will continue
to be in force post attorney departure. This isn’t as much of a problem
as it might seem in that the departing attorney will be able to rely on
former attorney language under the definition of insured. However,
because the definition of insured varies among insurers, you should
ALPS Risk Manager Mark Bassingthwaighte, Esq., has conducted more than 1,000 law firm risk management
assessment visits, presented numerous continuing legal education seminars throughout the United States, and
written extensively on risk management and technology. Check out Mark’s recent seminars to assist you with
your solo practice by visiting our on-demand CLE library at alps.inreachce.com. Mark can be contacted at
[email protected].
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THE GAVEL