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Liability and Retirement

Dear Dave
I am the sole owner of a fifteen member civil engineering and survey firm. I have had a good run, but I’m getting up in age and plan to wind things down within the next couple of years. None of my younger staff seems interested in buying me out and taking over the firm, and the older guys are all about the same age as me and will be ready to retire around the same time I plan to go.

My concern is covering myself for any professional liability exposure in the event a claim comes up in the years after I shut down the practice. Since professional liability policies only cover you for claims first made against the policy in place at the time of the claim, what I can do?

Dear CB
The first thing you must do is to meet with your attorney and professional liability agent to discuss your circumstances in light of the particulars of the statute of limitations in your home state and the options for coverage offered by your current carrier.

Each insurance company does things a little differently from each other, but most professional liability insurance carriers will offer what is commonly referred to as a “Tail” insurance policy to extend coverage for a period of time after you shut down the active practice. Your current policy document will usually have a section describing your insurer’s approach to tail coverage.

Generally, you will pay a one-time premium based on a multiple of the final year’s active practice premium depending on the number of years you wish to extend coverage. Tails typically are written for a period of up to five years. According to insurance specialists, most claims occur within the first couple of years of post-retirement so many professionals, unaware of any particular potential claims, will buy tail coverage for less than five years.

The dollar amount of tail coverage available is usually no more than the amount of insurance coverage in force in the final year you are actively practicing, and it is one single limit for the entire period of the tail. So, if you experience a loss and use up the policy limit in the early years of your tail, you will have no additional coverage for the remaining years of the policy. Sometimes principals, in anticipation of closing their firms, will increase their policy limits in the final years of their active practice to allow for a larger tail. If you are going to do this, to establish a higher tail limit, I have been told it’s a good idea to buy the higher coverage for at least the final three years prior to when you expect to buy your tail to establish the higher base coverage history.

Wahby and Associates