Claims-made insurance policies provide coverage for claims (or circumstances that may give rise to a claim) that are reported during the policy period based on an alleged error or omission on or after the insured's retroactive date. So long as coverage is renewed each year, claims may be reported under an existing policy. Normally, the policy limits of liability in force at the time a claim is made apply. So if a claim were made today based on an alleged error that occurred years ago, the current limits would apply, not those in place at the time of the alleged error or omission.
The only possible exception to this would be an instance where in response to an increase in the limits of liability, underwriters impose a split retroactive date. The net effect of this would be that the lower prior limit would apply to claims arising out of errors or omissions which occurred before the limit increase, even if the claim were made following the increase. Normally, this split retro scenario only occurs in the event of a limits increase of $1mil or more.
When, however, coverage is not renewed at all, such as when the insured firm is sold, otherwise wound up, or a sole practitioner retires, there is no longer a policy under which claims may be reported. To address this coverage need, many carriers offer an automatic extended reporting period (ERP or Tail) coverage lasting 30, 60, or even 90 days after policy non-renewal. Such short-term extensions, while helpful, fall far short of the typical statute of limitations period which can run for three or four years after a claimant's discovery of an error or omission resulting in damages. Accordingly, insurers offer ERP or Tail endorsements of various durations , which insureds can purchase
In answer to your hypothetical, if somebody were to sue you today for something that happened in 2017, the limits that are in place when the claim is made, not when the error occurred, would apply. So your 2020 policy limits, not your 2017, would be invoked. The only possible exception to this would be an instance where in response to your increasing your limits of liability, the underwriter imposed a split retroactive date. The net effect of this would be that the lower prior limit would apply to claims arising out of errors or omissions which occurred before the limit increase, even if the claim were made following the increase. Normally, this split retro scenario only occurs in the event of a limits increase of $1mil or more. To briefly address Extended Reporting Periods (“ERPs”) and Retirement. As noted in other articles, Claims made policies cover claims that are made (or circumstances that are noticed) during the policy period. So what happens when the policy ends? Firstly, many policies may have a built in (automatic) extended reporting period – in which for something like, 30, 60, or 90 days after the policy expires an Insured can still report a claim and be covered.
After that, you will need to purchase ERP (or “tail”) coverage for Claims arising from work performed up to retirement or the end of the policy, but that may not be filed for months or years afterwards. ERP or tail coverage basically says something like, we are not coving you for any more activities, but if a claim comes in during the next say 5-6 years that arises out of acts or omissions that took place previously - during the period of time our policy covered - we will cover that.
As I say to many professional fiduciaries: retirement means the end of practice, not the end of risk. What you did today could take years to filter through and make its way into a lawsuit against you. Make sure you cover your tail.