D&O Insurance Tail or ERP, What is it?
An ERP, known as Tail Coverage, is short for the extended reporting period and is commonly discussed around D&O, Employment Practice Liability, Professional Liability, and other management and professional policies. It’s common with all claims-made type policy forms.
As a quick refresher – the claims-made policy form is unique from the more common occurrence policy forms you may be familiar with. A claims-made policy covers claims that are “made” or presented to the insurance company insuring you when you become aware of a claim. A claim can be a lawsuit or other formal notice that may trigger coverage under your policy.
On the other hand, an occurrence policy that responds to a claim is the policy that was in effect when the claim occurred. So, as an example, a slip and fall on an icy sidewalk that happened in January 2020 is reported to the insurer you had in 2020.
Let’s learn what an ERP or D&O Insurance Tail is.
In a claims-made policy, if you terminate coverage either due to a change in your operations, you’re selling your business, or you merged with another company, you won’t have coverage for claims that may be reported after you terminate coverage. What do you do?
Every D&O, EPLI, or other claims-made policy states what the ERP, commonly called a tail in the insurance business, will cost you based on the duration of that tail.
Here’s the critical thing to understand. An extended reporting period only holds the window open to report claims that are based on an act or situation that happened before the termination of coverage.
For example, suppose you terminated an employee 8 months before merging your firm with another company, and you cancel your EPLI policy and purchase a tail when the merge is completed. Months after the merger, you receive a lawsuit for wrongful termination from the employee you terminated earlier. The good news is that you have coverage for that claim.
Now, flip that around and say you terminated your EPLI coverage on June 1st and purchased an ERP. Three months later, you receive a harassment lawsuit that alleges that harassment took place on June 15th – there is no coverage for that claim since the act took place after the termination of coverage.
The ERP or tail only provides coverage for claims reported after the termination of a claims-made coverage for acts that took place before coverage termination.
Why do you need to purchase a D&O Insurance Tail?
In the case of a merger, consolidation, or sale, the purchaser will usually require coverage for your prior acts that may not have yet become potential claims so that they will mandate the purchase of a Tail.
In the case of retirement or business closure, you’ll want the assurance that you have protection from any claims that may arise down the road from when you had business operations. The same applies if you change operations and no longer need a D&O or other professional or management liability.
What Happens When Moving to a PEO?
We also see that when a client moves to a PEO model, and the PEO provides employment practice liability, the insured decides to cancel their EPLI coverage. In this situation, the business owner will want to purchase an ERP because the new coverage through the PEO will not cover your prior acts.
What does an Tail cost?
That depends on the insurer, but you can expect to pay between 100% to 300% of the annual premium of the policy you’re canceling. Yes, that’s steep, but if this is triggered as part of a merger or acquisition, you may get the buyer to participate in some of the costs.
Have other questions on D&O insurance or on Extended Reporting ERP or Tail coverage? Why not click the button “get insured now” to get started? I promise no high-pressure sales gimmicks or other nonsense. We need to have a conversation to see if we might be a good fit for you and your firm. Thanks!
Gordon Coyle is The Coyle Group’s CEO and a seasoned business insurance expert with over 40 years of experience and four professional designations. He specializes in helping businesses with 25 to 1,000 employees navigate the complexities of risk and insurance, from cyber insurance to D&O protection and everything in between. Gordon is passionate about providing tailored solutions that protect businesses, their owners, and their futures.
Need guidance on your business insurance? Contact Gordon for help!