What is Tail Coverage in a Claims-Made Policy?

There are two predominate classes of policies are written on Claims-Made policy forms which often require a discussion of Tail Coverage:

• Management Liability (D&O, Employment Practice Liability, Fiduciary, Cyber) and;
• Professional Liability forms (E&O, Malpractices, Lawyers Professional, Accountants Professionals, etc.)

Here’s the basics of Claims-Made & Tail Coverage:

For a claim to be covered in a claims-made policy, the claim must be “made” or presented to the insurer during the policy term. This is not a problem for most insureds as long as coverage is kept in effect continuously without a lapse, and as long as continuity is preserved by from one policy term to the next even when changing insurers.

Here’s an example of continuity, let’s say a firm has had a D&O policy in effect since the company was formed in 2000.  The owners have changed insurance companies providing their D&O protection 4 times over the last 18 years but the continuity date for all policies is the inception of the original policy in 2000.  In 2018 they have a lawsuit presented to them involving allegations of a wrongful act by company officers which occurred in 2010.  Since there has been an unbroken chain of coverage this claim will be handled by the insurance company currently on the firm’s D&O policy – not the insurer from 2010.  This is a point of confusion for many insureds who are more familiar with occurrence type liability policies and not claims-made policies.

I am highlighting this policy feature of a claims made policy form for a reason, because we need to specifically address what happens to a claims-made form when it is terminated, which differs dramatically from an occurrence based form and how this relates to tail coverage.

The termination of a claims-made policy form can happen for any number of reasons:

• The insured goes out of business.
• The insured is merged into another firm.
• The insured believes they no longer need the coverage and wish to terminate coverage.

Regardless of why a policy is terminated, there is a policy provision that must be dealt with when the decision is made to end the policy, and that is what to do with situations or acts which may have occurred in the past but may not have arisen to a claim yet.  Remember, under a claims-made policy, claims are only covered if they’re made or presented to the insurer during a policy term.  One exception to that general rule is; unless the policy is terminated AND the insured has elected to purchase an extended reporting period, which is commonly called a “tail” or “tail coverage”.

Here’s an example to illustrate the problem.  An officer of a company made a wrongful decision to terminate an employee a year before the company sold to another firm.  On its face, the termination seemed appropriate, but 18 months later the disgruntled employee is having a tough time finding a job as well paying as what they had at the subject company and elects to file a wrongful termination claim upon their prior employer.  If the employer terminated their claims-made D&O (including employment practice liability) policy without purchasing a tail, the officer involved and any other employees, officers or directors named in the suit, would have no coverage.

This is why tail coverage is needed when terminating coverage.  Without extending the reporting period for claims, prior occurrences or acts will not be covered.

Now an important point needs to be made about extended reporting periods or tails and that is, is that it doesn’t extend the policy or coverage, it merely holds the window open for an insured to report or make claims to a policy for acts or allegations which occurred prior to the termination of the policy.

Let’s look at a different type of situation.  In this example an insured terminates a claims made D&O policy because they believed it was too expensive and not really needed.  They are continuing in business and elect to purchase a three year extended reporting period.  In year two of that extension they are presented with a lawsuit alleging a breach of contract which resulted from a business dispute 4 months earlier.  Since the alleged act took place after the termination of the policy, this is NOT a covered claim; even though the insured purchased a tail and the claim was made during the tail or extension period.  The reason is that the act which is giving rise to the claim happened after the policy terminated.  If the act happened prior to the termination of the policy, then it would be covered in this situation.

There are other situations which give rise to evaluating whether a tail or extended reporting period is needed, which we’ll discuss in future blog posts, but for now, the important consideration here is to understand that purchasing a tail on a claims-made policy is critical when terminating coverage for whatever reason.

Have a question or issue I didn’t cover here?  Why not drop me a note or give me a call, and let’s start a conversation!