Insurance is a key element of risk management and arranging cover that’s seamless is a vital part of this. Under professional liability claims-made policies, gaps can easily arise, since the terms typically stipulate that claims must be made against the insured when the policy is in force. If the policy lapses or expires, the insured would generally have no recourse to the cover if a claim against it arose. At renewals, they could therefore easily find themselves exposed.
So, what is tail insurance? It’s a solution that seals this gap, extending insureds’ ability to claim on their policy.
What is Tail Coverage?
What is tail coverage insurance? Also called an extended reporting period, it’s an add-on to claims-made insurance after the policy ends. With professional liability, claims may only come to light long after the service was delivered but tail policy insurance extends the amount of time the insured can claim on its policy beyond the original policy term. Claims-made tail coverage is offered on policies including errors and omissions, directors’ and officers’, and Employment Practices Liability.
Tail insurance applies only to claims-made policies, since occurrence-based policies don’t need this endorsement. With tail coverage, the carrier will pay valid claims after the claims-made policy ceases to be live, provided the event itself occurred during the original coverage period, or after any retroactive date agreed. Generally, the endorsement should last at least as long as the state’s statute of limitations. Holders of ‘claims-occurring’ policies don’t need tail coverage insurance as they have cover for all insured events that occur during the policy period, irrespective of when the claim is presented (assuming there’s no statute of limitations against the claim).
How Does Tail Coverage Work?
Tail coverage can be complex and expensive. Insureds should know:
- What is available under the claims-made policy. Some have built-in tail insurance coverage for a short period, usually 30 to 60 days.
- Some states mandate certain tail coverage, so understanding local regulation is key.
- Tail policy insurance is optional but will generally be offered unless the claims-made policy has been terminated by the insurer, for example in the case of fraud.
- The window to buy the coverage after the claims-made policy ends is usually short.
- The duration purchased, often between two to five years, should reflect the particular insured’s potential exposure.
- The tail policy can be bought from the provider of the original claims-made coverage, or sometimes from a new carrier.
- Tail coverage insurance doesn’t extend the claims-made policy cover itself or change the terms.
- Some tail insurance allows the claim to be both made against the insured and reported to the insurer during the tail period; but some stipulate that a claim must have been made against the insured during the policy period.
- The original event giving rise to the claim needs to have occurred between any retroactive date and the claims-made policy end.
- Insureds should retain evidence of the cover in place when the event occurred for indemnification.
- Claims-made tail coverage is generally not necessary if the insured is renewing with the same carrier.
- A claims-made policy will sometimes pay out after the end of the policy period if the insurer has accepted a notification of circumstances before it ended.
- Run-off coverage may be a suitable alternative to tail coverage.
Do I Need Tail Coverage?
We’ve looked briefly at how it works but in a real-life context, what is tail coverage, and do you need it for your business? At certain critical junctures in the insurance and business lifecycle the endorsement is particularly important.
When a business owner or professional is retiring, or otherwise moving on, when a company is sold, or in the event of bankruptcy the endorsement can protect the insured from claims that arise after their claims-made cover has ended.
It is also indispensable when switching from a claims-made policy to an occurrence-based policy. As highlighted previously, occurrence-based policies allow for a claim to be made and reported after the cover has ended, provided the event itself that gave rise to it occurred when the policy was in force. However, if a claim was presented during the occurrence-based policy period that arose from an incident before the new cover started, it wouldn’t be paid.
Sector-specific examples of where a tail policy could be called on include when a physician is sued for malpractice long after the original hospital treatment; or when a financial adviser’s investment advice leaves their client unable to pay their mortgage or their children’s college fees.
The types of insured that should consider tail coverage includes:
- Accountants
- Architects
- Attorneys
- Company directors
- Contractors
- Engineers
- Financial advisers
- Insurance brokers
- Manufacturers
- Management consultants
- Medical practitioners
- Real estate agents
How Much Does Tail Coverage Cost?
The cost of coverage varies by industry sector and insurance line, but it is typically between 100 percent and 300 percent of the annual claims-made premium. Medical malpractice premium, for example, generally falls around the middle.
The rate payable also depends on the insured’s size, and its particular situation, including its claims history, and the limits and retroactive date of the claims-made policy.
Critical to the cost is the length of coverage. Generally, the coverage should last at least as long as the statute of limitations in the relevant state.
We hope we’ve answered the question, “What is tail coverage?” and helped you understand how it plugs gaps after a claims-made professional liability policy has lapsed or expired. Insurance is a complex product but Insurance Insider US provides the expert insight and analysis you need to understand the nuances of this and many other aspects of the market, and keep pace with this fast-moving industry.
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