Do I Need Tail Coverage for My Liability Insurance?

Professional liability or malpractice insurance policies protect individuals and businesses from claims alleging professional negligence or errors. Understanding tail coverage is important for those with specific policies. This coverage protects professional services rendered in the past, even after a primary insurance policy has ended. This article explores what tail coverage entails, when it becomes necessary, and factors to consider.

What Tail Coverage Is

Tail coverage, formally known as an Extended Reporting Period (ERP) endorsement, functions as a safeguard for claims that arise after a claims-made insurance policy terminates. Professional liability policies come in two forms: “claims-made” and “occurrence” policies. An occurrence policy covers incidents that occur during the policy period, regardless of when a claim is reported, and does not require tail coverage.

A claims-made policy covers claims made and reported while the policy is active, for incidents occurring on or after a specified retroactive date. Without tail coverage, any claims filed after a claims-made policy ends, even if related to services performed while the policy was active, would not be covered. Tail coverage extends the window for reporting such claims, ensuring that past professional services remain protected. This extension is purchased from the insurer of the expiring claims-made policy.

The duration of tail coverage can vary, with options typically ranging from one year to an unlimited period. The cost of tail coverage is a one-time payment, calculated as a percentage of the expiring annual premium. This cost commonly falls between 150% and 300% of the last annual premium, influenced by factors such as the professional’s specialty, geographic location, and claims history. For instance, an annual premium of $10,000 might translate to a tail coverage cost of $15,000 to $30,000.

When Tail Coverage Becomes Necessary

The need for tail coverage typically arises in specific transitional scenarios when an individual’s claims-made professional liability policy is no longer active. One common situation is changing employers or professional practices, especially if the new employer does not provide retroactive coverage for past work. Similarly, if a professional retires from practice, tail coverage ensures protection for services rendered throughout their career.

Leaving a practice, dissolving a business, or simply ending a professional relationship also creates a need for tail coverage. In these instances, claims might surface months or even years after the professional has ceased operations, and without tail coverage, there would be no insurance to respond. Additionally, if a claims-made policy is cancelled or not renewed by the insurer, purchasing tail coverage becomes necessary to avoid a gap in protection for prior acts.

Another scenario requiring consideration of tail coverage is transitioning from a claims-made policy to an occurrence-based policy. While the new occurrence policy will cover future incidents, it will not cover claims arising from incidents that occurred under the previous claims-made policy. Tail coverage bridges this gap, providing continuous protection for the period covered by the former claims-made policy.

Key Considerations for Your Decision

Deciding whether to purchase tail coverage involves evaluating several factors related to your professional exposure and future plans. Understand your expiring policy type; tail coverage is only for claims-made policies. If your policy is occurrence-based, tail coverage is generally not required.

Consider the nature of your profession and the potential for claims to arise long after services have been rendered. Professions such as medicine, law, or accounting often face a delayed discovery period for errors or omissions, making the extended reporting period of tail coverage particularly relevant. For example, an accounting error might not be discovered until a client faces an audit years later.

Reviewing any contractual obligations, such as employment agreements or partnership documents, is also important. These agreements may specify requirements for tail coverage upon departure from a firm or practice. Weighing the cost of tail coverage against the potential financial impact of an uninsured claim is a practical consideration. While the upfront cost can be significant, the expense of defending a lawsuit and potential settlements without insurance could be substantially higher.

Your future plans also influence the decision. If you intend to fully retire, an unlimited tail coverage option might offer peace of mind, as claims can emerge many years after professional activity ceases. If you are transitioning to a new role, your new insurance policy might offer “prior acts” coverage, which could potentially negate the need for tail coverage from your previous policy.

Related Coverage Options

While tail coverage provides protection for past incidents reported after a claims-made policy ends, other related coverage options address similar concerns from a different angle. One such option is “nose coverage,” also known as prior acts coverage or retroactive coverage. Nose coverage is typically incorporated into a new claims-made policy.

This type of coverage extends the new policy’s protection backward to cover incidents that occurred before the new policy’s effective date, as long as there has been continuous insurance coverage. For instance, if you switch insurers, your new claims-made policy with nose coverage can cover claims arising from work performed under your previous policy, provided there was no lapse in coverage. This can sometimes eliminate the need to purchase a separate tail coverage from the previous insurer, as the new policy effectively covers the prior acts. However, it is crucial to ensure the prior acts date on the new policy extends back to the start of your continuous coverage to avoid any gaps.