Claims-Made Tail Insurance – What is it?

There are two predominate classes of policies 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, Malpractice, 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 from one policy term to the next, even when changing insurers.

Here’s an example of continuity: 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 had a lawsuit presented to them involving allegations of a wrongful act by company officers that 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 confusing for many insureds who are more familiar with occurrence-type liability policies and not claims-made policies.

I am highlighting this policy feature of the claims-made policy form 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 that 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, 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 against 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.  Prior occurrences or acts will not be covered without extending the reporting period for claims.

Tails and Extended Reporting Periods

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 before 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 unnecessary.  They continue 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 resulting 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 that is giving rise to the claim happened after the policy was terminated.  If the act occurred before the termination of the policy, then it would be covered in this situation.

Other situations give rise to evaluating whether a tail or extended reporting period is needed, which we’ll discuss in future blog posts. Still, 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?  Not happy with your current broker relationship?  Looking for an expert to provide greater advice and guidance?  Why not click the “get insured button” above to get started.  Thanks!