You can't control when a customer makes a claim against your business. There are times the claim is made after a policy's term ends, such as if you retire or close your company. Tail coverage gives you the protection you need for certain policies – as long as the policy was in force when the claim incident occurred.
What is tail coverage in insurance?
In business insurance, tail coverage – also called an extended reporting period – is an endorsement on an insurance policy for an incident that occurs during the coverage period, but gets reported after the policy expires or is canceled. As an endorsement, there is often an additional fee that you must pay. Tail coverage is found on commercial liability insurance policies that are claims-made policies.
Unlike occurrence-based policies that automatically include coverage for a claim that occurs during the policy period – regardless of when it was filed – tail coverage is a special addition to policies for policyholders concerned about late-filing claims.
Tail coverage is also different from a retroactive that starts coverage prior to the policy inception date. Retroactive dates extend coverage, while tail coverage extends only the reporting period.
How does tail insurance work?
Tail coverage gives you peace of mind that coverage for an incident exists after your policy is canceled or lapses. Tail coverage is an important consideration when you anticipate coverage changes. Tail coverage is typical when a business closes, a service provider retires or when a company moves to a new occurrence-based policy.
The way the tail coverage works is simple: It adds a reporting period to the end of your policy term. For example, assume your policy has a term date of Jan. 1 to Dec. 31, 2021, and you request to add tail coverage to this claims-made policy for six months. This means that a claim can be made after Dec. 31, 2021, through June 30, 2022, for an incident during the policy term in 2021.
Tail coverage doesn't extend coverage, meaning it won't cover an incident that happens after Dec. 31, 2021. If an incident does occur and someone files a claim against your business, the claim will be denied and you would be responsible for any losses or damages from that claim.
Who should consider tail coverage?
Tail coverage should be obtained if you plan to retire or close your business in the foreseeable future. It's also essential to get this endorsement if you're switching to an occurrence-made policy.
Consider this example: An accountant is about to retire and has had a claims-made insurance policy from Jan. 1, 2000, to Dec. 31, 2020. The accountant retires and closes his practice as of Dec. 31, 2020, meaning there will be no new potential exposure for a claim from that date. But the accountant can still be sued for work they did in 2018 with a claim filed in early 2021.
Without tail coverage, the accountant would be responsible for all legal and defense fees as well as any settlement or judgment that comes from the lawsuit. With tail coverage, the policy limits kick in and pay for the claim's defense while handling the settlement costs up to the policy limits.
When it comes to moving to an occurrence-made policy, remember that occurrence-made policies pay only for incidents that happen during the policy period, even though the claim can be reported anytime thereafter. This means that if your business moves from a claims-made policy that ends on Dec. 31, 2020, to an occurrence-made policy, there could be a coverage gap.
Imagine that an incident that occurred in December of 2020 wasn't reported until February of 2021. The claims-made policy without tail coverage would not cover the incident because it wasn't reported in the allowable period. The occurrence-made policy wouldn't cover it because the incident happened before coverage started.
How long should tail coverage last?
There may be gaps in coverage if your tail coverage doesn't extend for a long enough time period. For example, assume that the tail coverage on your policy ending Dec. 21, 2020, was for six months. This means that claims reporting could happen through June 30, 2021. However, if the insurance claims process began in July of 2021, your company wouldn't have coverage because the coverage period is over.
To avoid coverage gaps, talk to your insurance representative and legal counsel. Find out what the statute of limitations is in your state for filing claims. Ensure you have tail coverage that lasts as long as the statute of limitations so that you don't find yourself past the reporting date and uncovered.
What insurance types offer tail coverage?
You can get coverage on certain types of liability policies. Tail coverage is offered in claims-made insurance policies but not on occurrence-made policies.
These are the most common types of business insurance policies in which you can acquire tail coverage:
- Professional liability insurance
- Directors and officers insurance
- Employment practices liability insurance (EPLI)
Frequently asked questions
Here are some of the most common questions about tail coverage:
What's the difference between claims-made and tail coverage?
Tail coverage is a part of a claims-made policy. However, not every claims-made policy has tail coverage. This is an optional coverage usually added by endorsement to the policy. You'll have to ask for tail coverage, set the coverage length and pay the appropriate premium.
How much does tail coverage cost?
The cost of tail coverage will depend on the insurance type you have and the length of the tail coverage. One example is tail coverage added to medical malpractice insurance, which costs approximately 200% of the expiring premium. This means that a claims-made policy with a premium of $7,500 would require another $15,000 to obtain tail coverage.
Tail coverage is typically added before the policy expires or is canceled. So when you receive your renewal bill or the cancelation notice, you'll have the ability to add tail coverage. This may be two months prior to coverage termination. If you don't elect tail coverage before the policy's cancelation, you may have up to 60 days after the termination to add the coverage. Your insurance carrier will give you details on how to do this.
How do you obtain tail coverage?
As an endorsement, it's important to make the election for tail coverage: It isn't added automatically. Talk to your insurance carrier if you are concerned about obtaining tail coverage. Your representative will give you the details about the company's procedures for adding the endorsement and paying the additional premium.
Is prior acts coverage the same as tail coverage?
A claims-made policy can be modified in two ways: It can extend coverage to prior acts with a retroactive date, or extend the reporting period after the policy ends with tail coverage. Thus, prior acts coverage isn't the same as tail coverage; they are two different options you can choose with a claims-made policy. You can have one without the other, or you can opt for both.
Is occurrence-made or claims-made better?
Policyholders enjoy occurrence-made policies because they know they will be protected regardless of when a claim arises. However, these policies are generally more expensive than claims-made policies. To maximize cost savings, claims-made policies are the better option.
How can you tell if an insurance policy is claims-made or occurrence-made?
Most policies are occurrence policies. If you have a professional liability, EPLI, or directors and officers policy, you may have a claims-made policy. Because the claims-made policy only covers incidents where the claim is made during the policy period – or a tail coverage period – you'll want to ask your insurance carrier how your policy is categorized. If there is tail coverage, ask for how long so you fully understand the terms of your coverage.
What are runoff claims?
Runoff claims are similar to tail coverage. It's something provided for in a claims-made policy that states the insurance carrier remains liable for any claim caused by the policyholder, but made after the termination of the policy. A runoff period is usually longer – up to five years – whereas an extended reporting period or tail coverage often lasts only one year. Additionally, runoff claims are usually found when an insurance merger occurs.