How Does Tail Coverage Work for Claims-Made Insurance?
Protect your professional past. Learn how tail coverage ensures you're covered for past work after your claims-made insurance ends.
Tail coverage, often referred to as an Extended Reporting Period (ERP), is an additional insurance provision that allows claims to be reported after a claims-made insurance policy has expired or been canceled. This coverage protects individuals or businesses from liabilities arising from professional services rendered during the original policy’s active period, but for which a claim is only filed later. It extends the window for reporting claims, providing continued protection for past work.
Understanding Claims-Made Insurance and Tail Coverage
Insurance policies generally operate under one of two forms: “claims-made” or “occurrence.” An “occurrence” policy covers incidents that happen during the policy period, regardless of when a claim is reported, even if it’s years later after the policy has expired. In contrast, a “claims-made” policy covers claims that are reported while the policy is active, provided the incident also occurred on or after a specified retroactive date.
The crucial difference lies in the trigger for coverage: an occurrence policy is triggered by the date of the incident, while a claims-made policy is triggered by the date the claim is reported. For a claims-made policy, if the policy expires and no new coverage is in place, any claim reported after that expiration date, even for an incident that occurred during the active policy period, would not be covered. This creates a potential vulnerability for professionals.
Claims-made policies are common in professional liability insurance fields where the discovery of an error or omission might occur long after the service was provided. Professions such as medical professionals, lawyers, architects, and accountants frequently utilize claims-made policies for malpractice or errors and omissions (E&O) coverage. For these professionals, the risk of a claim emerging years after a service was performed makes tail coverage a relevant consideration.
When Tail Coverage Becomes Necessary
Tail coverage becomes necessary when a claims-made insurance policy is terminated, and there is a continuing exposure to claims arising from past professional services. Several specific circumstances trigger the need for this extended reporting period. One common scenario is when a professional changes employers or practices. If an individual leaves a firm where they were covered by a claims-made policy, that policy ceases to cover their individual liability upon their departure.
Another frequent trigger is retirement from practice. Upon retirement, a professional’s active claims-made policy will no longer be renewed, leaving them vulnerable to future claims stemming from their entire career. Similarly, selling a practice can necessitate tail coverage, as the previous owner may remain liable for services rendered prior to the sale. For instance, if a claim is filed two years after an accountant retires, but it relates to tax advice given five years prior, tail coverage would provide protection.
The duration of tail coverage can vary, but it is often available for an indefinite period or a long fixed term, such as five or ten years. Some policies may even include a limited “mini-tail” or “extended reporting period” automatically for a short duration (e.g., 30-60 days) after the policy ends, but this is insufficient for long-term protection. The decision on the length of tail coverage often depends on the statute of limitations for professional negligence claims in the relevant jurisdiction, which can range from a few years to much longer for certain types of claims.
Securing Tail Coverage
The process of securing tail coverage involves purchasing an endorsement, known as an Extended Reporting Period (ERP) endorsement, from the same insurer that provided the expiring claims-made policy. This is often the only option, as the expiring insurer originally underwrote the risk associated with the professional’s past services.
To initiate the process, the professional or entity should contact their current insurer well in advance of the policy’s expiration or cancellation date. They will need to request a quote for the ERP endorsement. This quote will detail the terms and conditions of the tail coverage, including the duration of the extended reporting period and the premium required. It is important to carefully review these terms to ensure the coverage aligns with the anticipated period of exposure.
The cost of tail coverage is a significant consideration and is influenced by several factors. Generally, the premium for tail coverage is a one-time, upfront payment, not an annual premium. This cost is often calculated as a percentage of the expiring policy’s last annual premium, commonly ranging from 150% to 250% of that amount. For example, if the last annual premium was $10,000, the tail coverage might cost between $15,000 and $25,000.
Factors influencing this cost include the professional’s specific specialty, their claims history, the limits of liability on the expiring policy, and the desired length of the extended reporting period. A longer desired reporting period or a history of past claims will result in a higher premium. Once the terms are accepted, payment is made, and the ERP endorsement is issued, providing the necessary protection for claims reported in the future that relate to past professional acts.