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Considerations in Buying E&O Coverage

In purchasing E&O coverage there are several important considerations to bear in mind.

Retroactive Date. E&O coverage is generally written on a "claims made" rather than an "occurrence" basis. In other words, coverage applies only to claims first made against the insured during the policy period which arise out of an act, error or omission on or after the retroactive date of coverage. If a claim arises out of some activity which preceded the retroactive date, coverage would be lacking, even if the claim were first made during the policy period. Accordingly, care should be taken to be sure that the appropriate retroactive date is selected. Generally speaking, the further back the retroactive date is the higher the premium will be up. Step rate increases are applied each year up to years 5, 6 or 7, depending upon the carrier, at which time the policy is deemed to be mature and the step-rate increases cease. Normally, a retroactive date will not be granted to include previously uninsured periods. Having said this, we have successfully had prior acts coverage reinstated for clents with coverage gaps. This is difficult to achieve, but can sometimes be done depending upon circumstances of the particular insured.

Predecessor Firms. E&O coverage is normally triggered only when the act, error or omission complained of was performed on behalf of the Named Insured or Predecessor Firm. Because of the changes that can occur in professional practices over time, it is often critical to identify the need for predecessor firm coverage and examine the policy's definitions in light of that need. A particular entity may qualify as an insured predecessor firm under one policy, but not under another.

Lateral Hires. As noted above, coverage generally only applies to claims arising out of acts on behalf of the Named Insured or Predecessor Firm(s). Accordingly, there is generally no prior acts coverage for professionals who later join the insured firm and whose prior practice does not qualify as a Predecessor Firm under the policy. These individuals are often referred to as "lateral hires". A number of carriers do offer lateral hire coverage, but it must be specifically requested. A few carriers offer such coverage by default. Depending upon your particular circumstances, you may want or specifically not want such coverage. Where a firm has or anticipates having lateral hires, this coverage becomes an important issue to address.

Tail Coverage Options. E&O coverage is generally written on a "claims made", so extended reporting period or "tail" coverage may be necessary. Because tail coverage can be quite costly, the options provided under any particular policy can be a very important consideration, especially for those faced with the prospect of closing down their professional practice within the next several years. The tail coverage options afforded under different policies vary markedly. Some policies contain no provisions regarding tail coverage at all, while others provide free tail coverage to long-time insureds.

Other Coverage Provisions. E&O policy forms vary widely from carrier to carrier. Accordingly, it is important to review with us the particulars of any given form in light of your coverage needs and what is generally available in the market.