What Is Tail Coverage and Who Needs It?Insurance Explained
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Tail coverage is a type of policy endorsement that can be purchased to extend certain types of insurance coverage. Namely, it can be added to claims-made policies in order to extend coverage for incidents that may have occurred while your policy was still active but were not reported until after your policy expired or was canceled.
You’ll commonly hear insurers refer to tail coverage as an “extended reporting period.” By adding this coverage, you are enabling your business to file a claim against your policy after the policy has expired.
To understand how tail coverage can help your business, let’s take a deeper look at why your business might need it and to what types of policies it can be added.
Why Businesses Purchase Tail Coverage
Most commonly, business entities will purchase tail coverage in times of transition. For example, the main partner of a small law firm could be retiring and decide to purchase tail coverage to maintain liability coverage in case lawsuits are filed against them for services provided while the liability policy was still active.
Similarly, it’s a good idea to purchase tail coverage if you have decided to close your business, in order to protect yourself from any risks you can still be liable for even when you’ve shut down completely.
Businesses also commonly purchase tail coverage when they have changed insurers. When one policy ends and you are switching to another policy offered by a different insurer, you want tail coverage to protect you during that transition, since your new policy won’t cover events that occurred while you were with your old insurer.
Tail coverage can give a business in this type of situation peace of mind, especially in times of transition and change.
Claims-Made Vs. Occurrence Insurance Policies
The biggest aspect of understanding what tail coverage does and why you might need it is intrinsically linked to being able to understand the difference between claims-made and occurrence insurance policies.
The biggest thing to focus on when comparing the two is not the coverage that they provide, but how they respond in terms of when a claim occurs and when it gets reported to the insurer.
Generally speaking, claims-made and occurrence policies can protect from very similar risks. The difference is in the timing of the claim.
To understand both better, let’s talk about the chief components of a claim first:
- Occurrence: This is when the claim occurs. For example, if an employee stole money from your store, the occurrence is the exact moment that the crime was committed.
- Discovery: This is the exact moment that you became aware of the occurrence, which is rarely immediate.
- Reporting: This is the moment you notified your insurance company of the occurrence. Ideally, you should report the incident as soon as you discover it.
Is One Type of Policy Better Than the Other?
If we’re talking about the coverage provided and general convenience, most business owners and insurers would agree that an occurrence policy is the better of the two. This is because it gives you unlimited time to discover and report your claim, even if the policy that was in effect at the time of the occurrence has long expired.
When you have an occurrence policy, as long as the activity or event occurred while your policy was active, you will be covered, no matter when the discovery and reporting occurred.
With a claims-made policy, you will be covered only if both the occurrence and reporting occurred when the policy was active. That’s why it’s incredibly important to make sure you are renewing claims-made policies on time so that there will be no gaps in your coverage.
If you do have gaps in your coverage, that would be another strong argument for purchasing tail coverage.
Here’s a list of common insurance policies that are typically written on a claims-made basis and often require tail coverage:
- Errors & Omissions (Professional Liability) Insurance: Covers professional mistakes and errors you have unintentionally made when providing your services or products to a client.
- Directors & Officers Insurance: Protects the private assets of your leaders from lawsuits related to misuses of company funds, misrepresentations of company assets, breach of fiduciary duty, non-compliance, and more.
- Employment Practices Liability Insurance: Covers lawsuits resulting from employee claims related to issues such as harassment and discrimination.
- Commercial Crime Insurance: Covers the financial losses resulting from a crime committed against your company by a third party or employee, including theft, fraud, embezzlement, and more.
Is There an Alternative to Tail Coverage?
Tail coverage is not the only option that businesses have when they want to fill potential gaps in their claims-made coverage. Another option that exists is purchasing what’s called “retroactive coverage,” which in some cases, might even be a better fit than tail coverage for your company.
While tail coverage will enable you to extend the reporting period of a claim, retroactive coverage enables you to cover incidents that could have occurred before the inception date of the insurance policy, even if you are completely unaware that these events have taken place.
When purchasing a claims-made insurance policy, retroactive coverage is most commonly referred to as “prior acts” coverage. If you’re going to purchase this type of coverage, the best option is to get “full prior acts” coverage, which means that the insurer you are buying the coverage from will agree to cover all covered incidents that occurred in the past, even if they have yet to be discovered or reported.
How Much Does Tail Coverage Cost?
There are many factors that go into determining how much your business is going to pay for tail coverage or retroactive coverage. Some of the main characteristics that insurers will look at include the following:
- How long you’ve been insured
- Your retroactive date
- Your claims history
Most insurers will advise you to purchase tail coverage that lasts as long as the statute of limitations lasts in your state. By doing this, claims are able to happen within the policy period and the time you have to report the incident will also be extended so that a lawsuit cannot be filed against you.
It’s highly recommended to be very familiar with what your state laws require when purchasing tail coverage. Buying and managing tail coverage on a claims-made policy is a very complex process, which is why you should be consulting an expert broker before making a decision.
If you’d like to speak to someone who will be able to better explain your tail coverage needs and how much you can expect to pay for this endorsement, don’t hesitate to get in touch with one of our brokers at any time.
Prior acts coverage is something that every business that purchases a claims-made policy needs to understand in order to ensure that there are no gaps in its liability coverage.
Whether you purchase a claims-made or occurrence policy will have a definite effect on not only how much you are paying for your coverage but also what the lifecycle of your coverage will look like.