Terminology Challenges Errors & Omission Considerations: Extended Reporting Period Vs. Tail Coverage

Insurance language can be tricky. We use a lot of jargon in our daily interactions and many of the terms we use are used very specifically for multiple types of coverages. We do this to cut down on the number of terms we need to remember and because we “know” the differences and can tell the difference. The tricky part about many of the terms we use is that, even though the terms can be used interchangeably they don’t mean the same thing depending on the coverage. The type of insurance being discussed has a deep impact on the meaning behind commonly used terms and our insureds don’t know what we know or should know about how those terms differ in respect to coverages.

Let’s look at an example, if you sell your insurance agency and need to get errors and omission prior acts coverage, you may ask for “Tail Coverage.” Tail coverage for an insurance agent in reality is an Extended Reporting Period (ERP) endorsement. When we say “Tail Coverage” our language assumes that this coverage is a renewed version of the policy, or a separate policy based on a cancelled policy. While, in fact, an ERP is an endorsement added after the policy that was in place is now cancelled. This means it endorses a cancelled policy, not that it is a renewed version of the policy, a renewable policy or a separate policy based on a cancelled policy.  You may ask yourself “Ok, so what’s the difference?”

The difference is multifaceted and distinct. As an endorsement the prior acts coverage cannot be renewed or expanded past initial purchase. The ERP cannot be financed because the policy is cancelled so no finance company will provide payment on a risk because it is a past risks since the coverage is no longer active going into the future. Finance companies can only collect on in place coverages not coverages that extends into the past and do not represent insurable interest to them should a payment not be made. Now, if we treated an ERP as “Tail Coverage” it would be an active policy in the true sense, with the possibility of renewal or financing of a risk into the future. However, what is being insured is the past risk which is why using the terminology of “Tail Coverage” interchangeably with or instead of “ERP” incorrect at best and certainly misleading.

Some other terms we use interchangeably are things like “Retention” and “Deductible”. These terms are often just meant to describe the amount paid for by an insured in the event of a claim, depending on the type of deductible. However, you must be careful especially in commercial lines because using the term “retention” as slang for “deductible” can get confusing. Retention in commercial policies often stands for “self-insured retention” which differs from a straight deductible because deductibles reduce the amount of insurance available whereas a self-insured retention is applied, and the limit of insurance is fully available above that amount. In an errors and omissions coverage for an independent agent the deductible is truly the amount incurred depending on the type of deductible an agent has. Whether they have a loss only or loss and litigation deductible type.

This illustrates again how common terms or jargon depending on the coverage type and even on who the coverage is for can vary the coverage in place and what we mean. It is normal for us to use slang and want to lower the number of terms we use, but just remember when we do that there are mitigating factors for the terms we choose to use. So next time you are thinking of your own errors and omission coverage, or an insured’s coverage stop to consider the coverage you want to convey with your words to ensure accuracy and clarity in your communication with your client and you own understanding of the coverage you are reviewing.

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