Thursday, July 10, 2008

Tail Trials and Tribulations - Part 2 (7/10/08 Knowledge Knugget)

So why would it matter if your insured's Extended Reporting Period (ERP) provision was uinlateral or bilateral?

Generally, an insured is not planning on going out of business, being purchased, having claims, or doing anything else that would make continuing with his existing policy undesireable. When any one of these things happens, and your insured needs to change carriers, or discontinue coverage altogether, it's exceedingly important that he have the opportunity to trigger tail with the expiring carrier.

He may not need to, depending on alternative terms available, but if alternative terms are unattractive (lower limits, reduced scope of coverage, higher retention), or if the alternative carrier refuses to provide prior acts coverage, the insured could find himself in a situation where he cannot change carriers without risking a gap in coverage.

This gap arises when a carrier on a unilateral tail policy offers renewal terms that are unfavorable, yet because the policy has not been nonrenewed or cancelled, the unilateral tail provision is not triggered. Or, the insured could cancel the policy mid-term, due to financial concerns, sale of the business, or other needs, or non-renew at the policy expiration, and he then has no ability to preserve reporting capability under the cancelled or expired policy. Again, this is because the *carrier* did not do the cancelling or nonrenewing.

Frequently, the insured may not have been in a position financially to purchase the tail, but you want that to be his decision, not a result of a placement that doesn't allow for tail to be purchased.

Unilateral tails are not the industry standard, but they are definitely on the street. You will want to check policy wording to ensure that the tail offer (Usually under a section entitled "Extended Reporting Period," or "Optional Extended Reporting Period") starts out with "If the Named Insured or the Carrier cancel or nonrenew.....". If the wording starts out with "Should the carrier cancel or nonrenew...." and the Named Insured is not included in that paragraph, you may have trouble brewing.

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