Understanding Tail Coverage

Tail coverage, a term often encountered in the context of liability insurance, plays a pivotal role in ensuring protection even after an insurance policy has expired. This comprehensive guide delves into the essentials of tail coverage, helping you navigate through its complexities and understand its significance in safeguarding your interests.

Executive Summary

Tail insurance, formally known as an Extended Reporting Period (ERP), is a critical provision in claims-made insurance policies, allowing policyholders to report claims after the policy has expired. E

ssential for policies like Directors and Officers (D&O), Errors and Omissions (E&O), and Employment Practices Liability Insurance (EPLI), tail coverage ensures protection for incidents occurring during the active policy period but reported later. It is particularly important during business transitions, such as mergers, sales, or closures.

Tail coverage must be purchased as an endorsement, often at a substantial cost, but it safeguards against significant financial and legal risks. Working with an experienced broker is vital to navigate coverage options, negotiate terms, and avoid gaps that could leave businesses exposed to liabilities.

Tail Coverage Meaning, What is Tail Insurance?

Definition and Importance of Tail Coverage

Tail coverage or more specifically, an Extended Reporting Period or ERP is a provision within insurance policies, specifically claims-made policies, which extends the reporting period for claims when a policy ends or is canceled.  It ensures that claims can still be reported to the insurer even after the expired policy period.

This is particularly important for D&O or Directors and Officers Insurance, Professional Liability Insurance, or E&O Insurance, EPLI or Employment Practice Liability Insurance, where claims may arise long after the service was provided. Tail coverage can give business leaders and professionals peace of mind, knowing they are protected from incidents that occurred during the active policy period but are reported later after a policy is canceled.

How Tail Insurance Differs from Other Policy Types

Unlike occurrence-based policies, which cover incidents that occurred while the policy is active regardless of when the claim is made, claims-made policies require the claim to be reported within the policy period. Tail coverage bridges this gap by extending the reporting period post-policy expiration.

This feature distinguishes it from occurrence insurance, providing crucial protection for potentially late-reported claims. Understanding this difference is essential for businesses and professionals relying on claims-made insurance policies for certain liability coverages.

Why Businesses Need Tail Insurance Coverage

Businesses, especially those offering professional services, need tail insurance coverage for their professional liability or E&O insurance policies to protect against unforeseen claims that may arise after a policy has ended. This is a critical component of business insurance, ensuring that past services or actions that may lead to liability issues are covered.

Tail coverage is particularly important for businesses and professionals in high-risk industries like medical/dental practices or legal services, where claims can surface years after the service was rendered.

Businesses can protect their reputation and financial stability from unexpected liabilities by securing tail coverage when a claims-made policy is terminated.

What about D&O Tail Insurance?

When a company is sold, ceases to operate, or cancels a D&O or Directors and Officers Liability policy, a D&O Tail will be needed to protect the directors, officers, and other company leaders for their acts in managing the affairs of a company.  This is true for private company D&O a well as public company D&O policies.

M&A: When a Seller Hasn’t Purchased D&O Insurance Previously

We have fielded calls from business owners about selling their company, and the buyer is insisting that they have a D&O Tail Policy but have never purchased D&O in the past.  What do you do now?

The good news is that we have arranged D&O protection for the seller, including prior acts coverage, which can be put into “run-off” (essentially a tail policy for D&O) for 6 years to satisfy the buyer’s requirements.

Often, this will include coverage extensions for Employment Practice Liability or EPLI, as well as Fiduciary Liability Insurance.

What is a Tail Policy?

There isn’t necessarily a separate “tail policy,” but instead an endorsement of an existing claims-made policy such as a D&O or E&O policy, which indicates that the policy is extended for claims reporting purposes past a certain termination date.  As stated earlier, the actual name of this extension is an extended reporting period (ERP).

How Much Does Tail Coverage Cost?

There are two perspectives on the issue of cost.

When a claims-made policy is currently in force

When a D&O, E&O, EPLI, or other claims-made policy is in effect, and that policy will be canceled, non-renewed, or terminated due to a company’s change in control, that policy will usually state the cost of a tail.  Often, there are options for different tail durations.  For example, 1 year, 3 year, or 5 year tails.

The corresponding costs will be approximately 125%, 225%, and 300% of the current policy’s premium, respectively.  This is a one-time premium payable at inception and is nonrefundable.

Unfortunately, there are times, especially during the sale of a company, when the buyer will insist on a tail duration longer than the options provided within a policy.

Now what?

This is where the role of the skilled broker will be invaluable, who will be able to either negotiate an extended tail term with the current underwriter or obtain extended terms with a new underwriter.

The Cost of  Tail Insurance, When a Claims-Made Policy is Not in Effect

As mentioned earlier, when a company is being sold, the buyer may insist that a tail be purchased on certain claims-made policies like D&O, EPLI, or E&O, but the selling company has not purchased these policies in the past.

Now what?

Again, this is where the role of a skilled broker will also become invaluable in negotiating the purchase of the desired policy with prior acts coverage and the required tail or ERP for the period of time mandated by the buyer.

This new policy will provide coverage “backward,” meaning it will pick up situations, incidents, or acts that transpired for a set number of years before the sale of the company, as well as provide a set number of years in which to report these claims.

The terms of the buyer are satisfied, and the seller clears any hurdles to the closing table.

Budgeting for Tail Insurance: Is it Worth the Investment?

Investing in tail insurance is a strategic decision that requires careful consideration of potential liabilities and financial implications. While the upfront cost may seem substantial, its protection against future claims can be invaluable.

Businesses must weigh the cost against the potential risk of facing lawsuits or claims without coverage. In many cases, the investment in tail insurance proves worthwhile, providing a safety net that protects your business from unforeseen financial burdens resulting from past actions.

When and Why Do You Need to Purchase Tail Coverage?

Scenarios That Require Tail Insurance / ERP Coverage

There are specific scenarios where purchasing an Extended Reporting Period is crucial. These include when a business is closing for being sold and when a professional retires.

In such instances, the need for tail coverage arises to ensure that any claims made after the policy ends are still covered.

Additionally, there are situations when a claims-made policy lapses or is non-renewed, and new coverage is purchased after several months.  Often, this new claims-made policy will have a new retroactive date, creating a gap between the two policies that needs to be addressed, as that break in continuity will mean that the prior acts of the old policy are not reportable to the new policy.

The only solution to fill that gap is to purchase a tail on the old policy and maintain coverage on the new policy moving forward.  This is an expensive mistake we’ve seen made by professionals who lapse one policy, thinking that “when they need insurance again,” they’ll just buy a new policy.  This may work for occurrence-based policies but not claims-made policies, and to fix this mistake may cost two or more years of premiums to be paid all at once.

Understanding the Reporting Period and Retroactive Coverage

The reporting period is a critical aspect of claims-made policies, determining the timeframe in which claims must be reported to be covered. Tail coverage extends this period, ensuring protection for claims arising after the policy has expired.

Retroactive coverage, on the other hand, refers to the protection against claims for incidents that occurred before the current policy’s coverage date. Understanding these concepts is vital for businesses to manage their liability risks effectively and maintain continuous coverage.

What Does Tail Insurance Coverage Provide Protection For?

Coverage for Incidents and Claims-Made Policies

Extended Reporting Periods are designed to protect against claims related to incidents that occurred during the original policy period but are reported after coverage is terminated.

This is particularly relevant for claims-made policies, where the timing of the claim report is crucial. By extending the reporting period, tail coverage ensures that such claims are not denied due to policy expiration, safeguarding the insured from potential legal and financial repercussions.

How to Get Tail Coverage and What to Consider

Steps to Purchase Tail Coverage

As discussed earlier, when a claims-made policy is going to be terminated, it’s time to consider purchasing an extended reporting tail.

A policy’s termination can occur due to:

• Retirement or closure of a business.
• A change in control in company ownership, which often triggers an automatic termination of coverage.  Often, the result of a merger or acquisition.
• Non-payment of premium.

Before these events, the insured should speak with their insurance broker about what will be needed to execute an ERP to their claims-made policies and how long a tail is desired.  The broker will contact the insurance company underwriter to confirm the pricing of that tail and then communicate it back to you, the insured.

When it comes time to execute the ERP, the insured reports that date to their broker, who will bill the insured for the tail-end cover; when that is paid, the broker will inform the underwriter to cancel coverage and put the tail in place.

Choosing the Right Insurer for Your Tail Coverage Needs

In most situations, the insurer currently writing a claims-made policy will be the insurer who sells you that tail coverage.

The deviation of this is when that insurer cannot provide the required or desired tail duration.  In situations like this, a skilled insurance broker can negotiate terms with a new insurer to provide the Extended Reporting Period as desired.

In real life, it is comes down to choosing the right insurance broker, not insurer to help in securing an ERP in unusual situations.

FAQs:

Q: If I sell my company, can’t I just renew my claims-made policy instead of purchasing a tail?

As mentioned in this article, many claims-made E&O and D&O policies will contain a “change in control” provision that automatically terminates coverage when 51% or more of the insured merges or is acquired.   As such, no real option exists to renew that policy, and an ERP is needed.

Q: What is tail coverage in business insurance?

A: Tail coverage, also known as extended reporting period endorsement, is a provision in a claims-made insurance policy that allows the insured to report a claim against their policy even after the policy expires or is canceled. It helps your business manage claims filed after your policy ends.

Q: How does tail coverage work with occurrence policy and claims-made basis policies?

A: Tail coverage is relevant only to claims-made policies requiring claims to be reported within the policy period. An occurrence policy covers incidents that happen within the policy period, regardless of when the claim is filed. In contrast, tail coverage extends the time to report a claim for a claims-made policy, allowing for claims to be filed after your policy has ended; as such, tail coverage is not a consideration to an occurrence policy.

Q: Why might a business owner need tail coverage?

A: Business owners might need tail coverage to protect against potential claims reported after their liability policy has expired. This is crucial in ensuring continuous protection and managing tail risks that arise from incidents that occurred while your policy was still active.

Q: What is the difference between claims-made and occurrence insurance?

A: The main difference between claims-made and occurrence insurance is the timing of when a claim must be reported. Claims-made coverage requires claims to be reported during the active policy period, while an occurrence policy covers incidents that occurred when the policy was active, even if the policy has since expired.

Q: When should a business consider buying tail coverage?

A: A business should consider buying tail coverage when transitioning to a new policy if their current insurance is being canceled or when they are retiring or closing the business. This ensures that any claims filed after the policy ends are still covered as long as the statute of limitations has not expired.

Q: How does tail coverage help in managing tail risks?

A: Tail coverage helps manage tail risks by providing a safety net for claims filed after the original liability policy period. This is essential for officers’ insurance and other professional liability policies, as it ensures that claims related to incidents during the policy period are covered, even if reported later.

Q: Can tail coverage be added to any commercial insurance policy?

A: Tail coverage is only associated with claims-made liability insurance policies. Not all commercial insurance policies offer tail coverage, and it is not needed for occurrence policies. Business owners should consult with their insurance broker to learn about what tail coverage options may be available for their specific policy.

Q: What happens if a claim is filed after the policy expires without tail coverage?

A: If a claim is filed after a claims-made policy expires without tail coverage, the claim may not be covered, exposing the business to financial risk. This highlights the importance of managing tail risks by securing appropriate tail coverage for claims-made policies.

Q: Is an occurrence policy the better choice to avoid needing tail coverage?

A: The policies we’ve discussed here; D&O, E&O / Professional Liability, Employment Practice Liability or EPLI, Fiduciary Liability, and Cyber insurance are typically only available as claims-made policies and are not offered as occurrence policies.

While an occurrence policy may seem like a better choice to avoid the entire tail issues, the fact remains that for the most part, no insurers offer these coverage forms on an occurrence policy basis.

Conclusion

The complexities of claims-made policies discussed in this article often require the expertise of a broker that specializes in these types of policy forms at the time you purchase that policy, renew it, or terminate it and require a tail.

If you are faced with a situation where your current broker is unable to secure you the terms you desire or are required to purchase, then reach out to us and we’ll get to work and secure you the protection you need.  As a specialist and active broker working in the D&O, E&O, Cyber and other specialty forms marketplace we have the relationships with underwriters that can help us get you the protection you need.