What Is a Tail Insurance Policy and Who Needs One?

Professional liability insurance protects individuals and businesses from claims alleging negligence or errors in their professional services. However, certain circumstances, such as changing jobs or retiring, can create gaps in this protection, leaving professionals exposed to claims arising from past work. This highlights the need for solutions to maintain continuous coverage after a primary policy ends.

Claims-Made Versus Occurrence Policies

Professional liability insurance policies are structured as either claims-made or occurrence. The distinction lies in how and when coverage is triggered, which impacts a professional’s long-term protection. Understanding these differences is foundational to appreciating tail insurance.

A claims-made policy covers claims made and reported during the active policy period, regardless of incident date. If the policy expires or is terminated, claims reported after that date are not covered, even if the error happened while the policy was active. Continuous coverage is necessary with claims-made policies for protection against future claims from past work.

In contrast, an occurrence policy triggers coverage when the incident occurs during the policy period, regardless of claim date. Claims can be filed years after the policy expires, and coverage still applies if the event took place during the active term. Occurrence policies generally do not require additional coverage like tail insurance, as they provide perpetual protection for incidents during the policy term.

The nature of claims-made policies creates a “tail” or “runoff” risk, as coverage ceases upon policy termination for claims reported afterward. This necessitates extending the reporting period for claims that may surface after a claims-made policy is no longer active. Without such an extension, professionals could find themselves without coverage for incidents that occurred during their insured practice.

What Tail Insurance Is

Tail insurance, or an Extended Reporting Period (ERP) endorsement, solves the coverage gap in claims-made professional liability policies. It allows claims to be reported after a claims-made policy expires or terminates, provided the incident occurred while the original policy was active. This endorsement extends the window for reporting claims, offering continued protection for past services.

Tail insurance is not a new policy covering new acts; it is an extension of the original claims-made policy. It maintains coverage for “prior acts”—services rendered while the claims-made policy was in force. This addresses the “long-tail” nature of professional liability, where claims may arise years after the service.

Professionals typically purchase tail insurance from the original claims-made policy insurer. This ensures continuity of coverage under the same terms and conditions as the active policy period. The extended reporting period closes the potential coverage gap once a claims-made policy is no longer active.

Scenarios Requiring Tail Coverage

Several professional and business transitions necessitate tail insurance to protect against future claims from past work. Understanding these scenarios helps professionals plan for this coverage. A common situation is retirement, where a professional ceases practice. Without tail coverage, claims filed after retirement for services rendered would not be covered by their expired claims-made policy.

Changing employers or practices frequently triggers the need for tail coverage. If a professional moves to a new position and the new employer’s policy does not provide “prior acts” or “nose” coverage for prior work, a gap can arise. Similarly, if a professional leaves an individual claims-made policy, tail coverage ensures continuity for past activities.

The sale, merger, or dissolution of a professional practice also makes tail coverage important. When a business ceases operations or undergoes structural change, the original claims-made policy may terminate, leaving former owners vulnerable. Tail insurance provides runoff coverage for liabilities incurred before the business transition.

If a claims-made policy is not renewed by the insurer or is cancelled by the insured, tail coverage becomes a consideration. A lapse in coverage can eliminate protection for all prior acts, underscoring the importance of securing an extended reporting period.

Features of Tail Coverage

Tail coverage extends the reporting period and has specific features defining its scope and cost. Tail policies can vary in duration, offering options like one, three, five years, or unlimited coverage. Duration selection often depends on the profession’s risk profile and applicable statutes of limitations.

The coverage scope of a tail policy mirrors that of the expiring claims-made policy. Limits of liability, deductibles, and types of services covered remain consistent with the original policy. Tail insurance does not introduce new coverage types or increase existing limits; it simply extends the reporting period for claims related to past acts.

Premium for tail coverage is generally a one-time, upfront payment. This cost is often calculated as a multiple of the last annual claims-made premium, commonly ranging from 150% to 300%. Factors influencing this premium include the professional’s claims history, specialty, and chosen duration.

Tail coverage adheres to the retroactive date of the original claims-made policy. The retroactive date establishes the earliest point from which professional acts are covered. Tail coverage only covers incidents that occurred on or after this retroactive date and before the original policy’s termination, aligning with historical coverage.