What Is Tail Coverage and Why Is It Necessary?
Understand tail coverage: the vital insurance extension that protects professionals from claims arising from past work after a policy terminates.
Professional liability insurance covers individuals and businesses against claims of negligence or errors in their services. While this insurance protects during active practice, “tail coverage” becomes relevant when a policy ends. This extended coverage addresses potential liabilities from past professional services after the primary policy ends.
Understanding the Foundation: Claims-Made Policies
Professional liability insurance policies are structured in one of two ways: “claims-made” or “occurrence-based.” A claims-made policy only covers claims made against the insured and reported to the insurance company while the policy is active. If a claims-made policy expires or is terminated, any claim reported after that date, even if the incident occurred during the policy period, would not be covered.
An occurrence-based policy covers incidents that happen during the policy period, regardless of when the claim is reported. For example, if an incident occurs in 2020 under an occurrence policy, but the claim is not filed until 2025, the 2020 policy would still provide coverage. This difference highlights why tail coverage is necessary for claims-made policies.
What Tail Coverage Is
Tail coverage, or an Extended Reporting Period (ERP) endorsement, is an add-on to a claims-made professional liability policy. It allows reporting of claims arising after the policy ends, provided services were rendered while the original policy was active. This extends the timeframe for reporting past incidents, ensuring protection.
Situations Requiring Tail Coverage
Tail coverage is necessary in several scenarios to protect against past professional services. When a professional retires from practice, their active claims-made policy ceases, leaving them exposed to future claims. Changing employers or moving to a new practice often results in the termination of the old policy, creating a coverage gap for prior work.
Policy cancellation, whether initiated by the insured or the insurer, also triggers the need for tail coverage. If a business closes its operations, it no longer maintains an active claims-made policy, but liabilities from past services can still emerge. Without tail coverage, claims reported after the policy’s termination would not be covered, even if the incident occurred during the active policy period.
Key Considerations for Tail Coverage
Extended reporting periods vary, from one to five years, with some policies offering unlimited options. Many professionals choose a duration that aligns with the statute of limitations for claims in their profession. The coverage limits for tail coverage mirror those of the expiring claims-made policy, meaning the protection extends at the same financial thresholds.
The cost of tail coverage is influenced by several factors. It is calculated as a percentage of the most recent annual premium of the claims-made policy, ranging from 150% to 300% of that premium. Factors such as claims history, profession risks, and the desired length of the extended reporting period contribute to the final cost.
Securing Tail Coverage
Obtaining tail coverage involves a process initiated with the insurance provider of the original claims-made policy. The existing insurer offers this extended reporting period endorsement. Professionals should notify their insurer of their policy termination or transition and request a quote.
The process involves confirming the policy termination date and specifying the desired length of the extended reporting period. Payment for tail coverage is a one-time, upfront expense. While it is most common to secure tail coverage from the current insurer, some may explore options from other providers.