Originally general liability covered accidents—sudden, unexpected events that happened at a specific time and location. Under the current general liability forms, the concept of accident has been expanded to include occurrences - continuous or repeated exposure to conditions that result in bodily injury or property damage that was neither expected nor intended (by the insured).
Older occurrence policies covered events that happened between the effective date and the expiration date of the policy. Regardless of when a claim was made, the policy in effect at the time of exposure to the injurious condition was the one that would respond to the claim, whether or not the same carrier was providing the coverage.
Several insurance companies issued occurrence policies for asbestos manufacturers in the 1940s and 1950s. Forty years later, these insurers are still paying millions of dollars in claims and legal defense costs for policies under which they collected only a few thousand dollars in premiums.
Because the delay between the occurrence and filing of a claim resulted in difficulty in developing premiums adequate to anticipate claims that had been incurred but not reported (IBNRs), insurance companies developed so-called “claims-made” coverage for risks with a long delay—sometimes called long tailed exposures.
Basically, the occurrence form pays for (or covers) injury or damage that happens during the policy period, while the claims-made form responds to claims filed during the policy period.
The claims-made coverage provided a precise claim trigger that made it possible for insurance companies to determine when coverage began and which policy should respond. Under the occurrence form, the policy or coverage in effect at the time the incident happens, responds. Under the claims-made form, coverage in effect at the time the claim is reported responds.
Claims which trickle in after the end of a policy period create an exposure known as a claims tail. Tail coverage is automatically built into the insuring agreements of occurrence forms. This is not the case with claims-made forms, and the forms would be unacceptable if they left policyholders exposed to serious insurance gaps which could not be covered. Extended reporting periods were created to solve the problems of coverage terminations and transitions back to occurrence coverage.
Mini-tail:An extended reporting period with a very short (i.e., 60 days) duration. The Insurance Services Office, Inc. (ISO), commercial general liability policy's mini-tail is part of the basic extended reporting period. It runs concurrently with the midi-tail and covers claims associated with occurrences previously unknown to the insured.
Midi-tail: A term used for an extended reporting period longer than 60 days but not unlimited. The standard Insurance Services Office, Inc. (ISO), claims-made commercial general liability (CGL) policy midi-tail is for 5 years. The CGL's midi-tail applies only for known and reported circumstances in most cases.
Under the claims-made form, the “trigger” for coverage is when a claim is made to the insurance company. For some losses, a considerable gap may exist between the time when injury or damage occurs and when the claim is first made. In some cases, there may even be a gap between when an injury occurs and when it is discovered or first becomes known to the insured. This potential gap is known as a “claims tail”—it may take a period of years for all losses arising out of a given exposure to be realized.
Example: A slip and fall that occurs on the insured’s property may cause a back injury that takes some time to manifest itself. In this case, it is not until the back injury is reported that a determination of coverage will be made. ERPs allow the insured to obtain coverage long after the policy period has ended—and that’s useful in situations like these.
If claims-made coverage is continuously renewed without advancing the retroactive date, future claims will be covered regardless of when the injury or damage actually occurred. But if the continuity of claims-made coverage is disturbed by cancellation, nonrenewal, or replacement by a policy with a later retroactive date, a gap in coverage is created. This gap may be filled by an ERP, which provides “tail coverage.”
Under an ERP, the insurance company agrees to provide one or more extended reporting periods if claims-made coverage is (1) canceled, (2) not renewed, (3) replaced by coverage that has a later retroactive date, or (4) replaced by coverage that is not written on a claims-made basis. Extended reporting periods do not extend the policy period. An ERP simply extends the period for reporting claims—the injury or damage must still have occurred, or the offense causing injury must still have been committed, before the end of the policy period. An important feature of extended reporting periods is that once in effect, an ERP may not be canceled.
A basic ERP is provided automatically without charge in any of the situations mentioned previously which might create a gap in coverage. It has two parts: a period of 60 days after the end of the policy period is provided for reporting any claims (whether or not the “occurrence” or “offense” was previously reported); and a period of five years after the end of the policy period is provided for reporting any claims for which the “occurrence” or “offense” has been reported to the insurance company no later than 60 days after the end of the policy period. This means that the insured has a long time to file a formal claim—as long as the insured has notified the insurance company within 60 days that something has happened.
The basic extended reporting period does not apply to any claims which are covered by any subsequent insurance purchased by the insured, or which would have been covered except for the exhaustion of policy limits.
The basic ERP is treated as an extension of the original policy, and does not change or reinstate any limits of insurance—if any part of the aggregate limits has been used up, coverage is limited to the unused portion of those limits.
The basic ERP does not provide complete protection for an insured. If an occurrence which could lead to a claim first becomes known to the insured more than 60 days after the end of the policy period, it could not be reported to the insurance company within the required time period, and there would be no coverage under the basic ERP. If an occurrence is known to the insured and is reported to the insurance company during the policy period or within 60 days after expiration, but the claim is first made more than five years after the expiration date, there would be no coverage under the basic ERP.
A supplemental ERP of unlimited duration is available for an additional charge. When purchased, the supplemental extended reporting period picks up where the basic ERP leaves off—it would cover claims arising out of an occurrence first reported more than 60 days after expiration, and it would cover claims-made more than five years after expiration. In some ways, this converts the policy into an occurrence policy. It gives the insured an unlimited time to report—and the insurance company will make the insured pay more for that privilege.
The supplemental ERP must be requested by the insured in writing within 60 days after expiration. The additional premium for this coverage cannot exceed 200 percent of the last annual premium charged for the claims-made CGL coverage. Supplemental ERP coverage is put into effect by attaching an endorsement to the policy, and it will be excess over any other coverage in effect after the supplemental extended reporting period starts.
Under the supplemental ERP, the two aggregate limits are reinstated in full, and the sublimits (for each occurrence, personal or advertising injury claims, and fire damage) continue to apply as they did during the policy period.