Who Pays for Tail Coverage: Employer or Employee?

Within the framework of professional liability insurance, “tail coverage” emerges as a specific consideration, particularly when a professional’s insurance policy changes or terminates. The question of who bears the financial responsibility for this unique coverage is a common point of inquiry for many professionals.

What Tail Coverage Is

Tail coverage, also known as an Extended Reporting Period (ERP), is an important component of claims-made professional liability insurance policies. It allows claims to be reported after a claims-made policy has expired or been canceled. The purpose of this coverage is to address claims that arise from incidents that occurred while the policy was active, but where the claim itself is made at a later date.

Claims-made policies only cover incidents reported while the policy is in effect, and which occurred on or after a specified retroactive date. Therefore, when such a policy ends, potential claims for past work would not be covered unless tail coverage is secured. This extended reporting period becomes necessary in various situations, such as changing employers, retiring from practice, or closing a professional business. Without it, a professional could face significant personal liability for past services.

Who Typically Pays

Determining who pays for tail coverage often depends on the specific circumstances surrounding a professional’s departure from a role or practice. When an employee leaves a practice voluntarily, especially to join a new employer or establish their own business, the departing individual is frequently responsible for purchasing the tail coverage.

Conversely, if an employer terminates an individual’s employment, particularly without cause, the employer may assume the cost of tail coverage. This arrangement can be part of a severance agreement or a standard practice by the employer to mitigate their own potential liability. Some employers recognize the mutual benefit of ensuring their former professionals are covered.

For professionals entering retirement, the responsibility for tail coverage can vary. Some employers offer to cover the cost of tail coverage as a retirement benefit, particularly if the professional has met certain tenure requirements, such as practicing for a minimum number of years with the same policy. However, in other instances, the retiring professional must purchase the coverage themselves. The cost of tail coverage can be substantial, often ranging from 150% to 250% of the last annual premium.

When a professional practice is sold or closes, the terms of the sale agreement typically dictate responsibility for tail coverage. The acquiring entity might assume the prior acts liability, or the selling entity might be required to purchase tail coverage to protect its former principals and employees. In some scenarios, the cost of tail coverage might be shared between the employer and employee, or negotiated as part of a separation agreement. This shared responsibility approach can help distribute the financial burden.

How Employment Contracts Affect Payment

Employment agreements and professional service contracts play a decisive role in establishing who is financially responsible for tail coverage. These contracts often contain specific clauses addressing professional liability insurance, including provisions for tail coverage.

These contractual clauses should clearly specify which party, the employer or the employee, is responsible for the cost of tail coverage upon termination of employment. They may also detail the conditions under which this responsibility might shift, such as the reason for termination or the length of employment. For instance, a contract might state that the employer pays for tail coverage if employment is terminated without cause, but the employee is responsible if they resign.

Negotiating these terms before signing an employment agreement is a sound practice. It allows professionals to understand their potential financial obligations and to advocate for favorable terms. The clarity of language in these contracts is paramount to prevent misunderstandings and disputes. A well-defined contract will leave no ambiguity regarding payment responsibility, the timing of payment, and any other conditions related to tail coverage.

Other Ways to Handle Prior Acts Coverage

Beyond purchasing a separate tail coverage policy, other options exist to address prior acts liability when a claims-made policy terminates. One common alternative is obtaining “prior acts coverage,” also known as “nose coverage,” from a new insurance carrier. This type of coverage is incorporated into a new claims-made policy and retroactively covers claims for incidents that occurred under a previous policy.

When a new insurer offers nose coverage, it effectively assumes the risk for past professional services performed by the insured. This negates the need for the professional to purchase tail coverage from their previous carrier. The new policy’s retroactive date is set to the original inception date of the professional’s prior, uninterrupted claims-made coverage.

However, obtaining nose coverage is not always an option and typically depends on certain conditions. Insurers often require continuous coverage without any gaps between the old and new policies. The professional typically needs to remain in the same specialty or area of practice for nose coverage to be viable. If nose coverage is secured, the cost of tail coverage from the previous policy is avoided, which can result in significant savings for the professional or their new employer.