Every firm has a life-cycle. Professionals leave firms to practice individually or to join another firm; a firm might dissolve as a business entity or be acquired by or merge with another firm; or, firm owners may retire or be unable to continue providing professional services. These firm transitions require special protection, and they should be discussed with a firm’s professional liability insurance broker or agent to determine how best to proceed.
All professional liability insurance available to design firms is written on a claims-made basis. For a claim to be covered, the claim has to be first made against the policyholder and reported to the insurance company during the policy period (claims-made and reported coverage). If a policy expires, and a claim is thereafter made, the individual professional and the firm will not have coverage under that policy. Some policies will provide coverage for claims related to negligent performance during the policy period – provided that the claim is reported within a set and limited time after the policy expiration date. Coverage is provided for claims made and reported after the expiration of a claims-made policy only if such claims arose from acts or omissions occurring during an insured period of time and reported before the extended reporting period ends. For instance, the CNA policy offered through Schinnerer includes an automatic 60-day reporting period after the policy is terminated.
This coverage carried by design professionals is sometimes referred to as a “long-tail” line of insurance. A negligent act or omission may take place today, but harm arising from that act or omission may not be discovered or a claim made against the design firm or the individual professional (who by signing and sealing the design documents took responsibility for the project under state licensure laws) for a considerable period of time. In most states, this period is cut off by the applicable statute of repose. In other states and in those where the statute of repose only encompasses improvements to real property, the risk could be in perpetuity because of the obligation placed on the professional and the professional’s firm by the state.
To extend the coverage of a professional liability policy beyond its policy term, it’s possible to purchase reporting coverage through an “Extended Reporting Period” or “ERP.” The extended reporting period is the time during which a claim arising from an act or omission occurring prior to the inception date of the ERP can (in most cases) be reported and covered, subject to the policy’s terms and conditions. Most professional liability policies provide an insured with options to purchase ERPs of varying length. The insured typically may purchase the ERP for a period of one year, three years, five years, and, under some policies, a ten-year time period. The cost is generally a multiple of the last annual policy premium and depends upon the length of time selected for the extended reporting period.
A continuation of coverage or the purchase of an extended reporting period is important to design professionals and their design firms when significant changes occur. To find out more, click here for five critical scenarios illustrating when a design professional should purchase “tail” coverage.
Victor O. Schinnerer & Company, Inc. and CNA work with the AIA Trust to offer AIA members quality risk management coverage through the AIA Trust Professional Liability Insurance Program, Business Owners Program, and Cyber Liability Insurance to address the challenges that architects face today and in the future. Detailed information about both these programs may be found on the AIA Trust website, TheAIATrust.com.