Tail Coverage

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What Is Tail Coverage?

Tail coverage refers to the extended protection that a business receives beyond its actual insurance policy term. Also known as extended reporting period, this insurance coverage safeguards businesses from potential liabilities, arising within the policy term, but being claimed after the term comes to an end.

Tail coverage costs, or premiums, are typically steep, often reaching up to 300 percent of the latest policy premium. This costliness is due to its coverage of past insured events, which may not manifest for several years. Having this insurance coverage allows businesses to focus on their functioning without getting troubled by the claims made against them for anything in the extended reporting period.

What Is Tail Coverage?

Tail coverage is a coverage policy that offers an extended period of protection to businesses and medical practitioners when it comes to covering liability for claims made after a policy has expired or been canceled.
The incidents in question, however, must have occurred during the term when the policy was active.
The extra layer of security offered by tail coverage gives peace of mind and helps mitigate financial risks associated with unforeseen claims.
Tail coverage differs from prior acts coverage, which retroactively protects against claims arising from incidents predating the current policy's inception.

How Does Tail Coverage Work?

Tail coverage offers reassurance that coverage for an incident remains intact even after a policy is canceled or lapses. It becomes particularly crucial during anticipated coverage changes, such as business closures, the retirement of service providers, or transitions to new occurrence-based policies.

Additionally, it extends a reporting period beyond the policy term's end. For instance, if a policy term of coverage is valid from July 1 to June 30 of a particular year and has tail insurance extending it to six more months, the claims made tail coverage against the policyholder from July 1 to December 31 for that year would be covered under it.

However, it is important to note that this coverage doesn't extend the coverage itself. It is the policyholder that needs to apply for an addition to the claims-made coverage as per the guidelines and regulations that particular states or nations follow. Thus, if an incident occurs after the policy term ends and one has not applied for the tail insurance beforehand, the claim would be denied. In such a case, the business, i.e., the policyholder here, would become responsible for bearing any resulting losses or damages.

Conditions

For a tail coverage to be valid, there are certain conditions that the situation must satisfy:

The event for which the claim is being made against the policyholder must have occurred within the policy term. This term starts on or before the retrospective date and ends with the end of the policy term.
Tail insurance is available for a specific extended period. If any claims against the policyholders are made after the tail insurance term ends, the coverage would not be applicable.
Purchasing this extended insurance coverage does not bring changes in the limit of liability of any policy.

Examples

Let us look at the instances below to understand the concept better.

Example #1

Suppose Sarah, a seasoned physician, decided to retire after decades of practice. Her medical tail coverage malpractice insurance policy would expire on December 31, 2023. She had to address potential liabilities that could arise from past patient treatments. Understanding the importance of the tail policy, she opted to extend her policy's reporting period for an additional two years.

By doing this, Sarah ensured that even after her retirement and the expiration of her policy, she would still be protected against any malpractice claims related to patient care during her active years of practice. This decision provided her with an assurance that her hard-earned reputation and financial security would remain safeguarded throughout her retirement.

Example #2

A Forbes report published in January 2021 discussed situations where it is important for one party to ensure that the other party, which it is involved in a business deal with, has an active tail coverage policy. It talks about mergers and acquisitions (M&A) deals, indicating how a company stops paying for a directors and officers (D&O) liability insurance policy as soon as their existing company is acquired.

Once the acquisition is successfully done, the selling company’s insurance providers become unavailable to answer queries on behalf of the directors. Hence, the report advocates how a buying party must confirm that the selling party has a D&O tail policy coverage enrolled for, extending their existing claims-made coverage to avoid troubles at later stages.

Benefits

Tail coverage comes with multiple advantages for businesses or professions. This is especially true for areas where claims against the policyholders are much expected. Some of the benefits of these coverage policies include the following:

It offers financial security to businesses and peace of mind, allowing them to focus more on their functioning.
For people who retire from their businesses, this extended coverage becomes a savior. Through this, they know they have coverage against any kind of liability until their new policy becomes active.

Tail Coverage vs Prior Acts Coverage

The claims made coverage exist in various forms. One is the tail coverage, and the other is the prior acts coverage, which is also known as the nose coverage. However, these two policies differ from each other in many ways. The differences are as follows:

Tail Coverage	Prior Acts Coverage
Tail coverage, also known as an extended reporting period, provides coverage for claims made after a policy has expired or canceled, but for incidents that occurred during the policy's active term.	Prior acts coverage, also known as nose coverage, offers protection for claims arising from incidents that occurred before the current policy's inception date.
It focuses on extending the reporting period for claims made after the policy's expiration. It ensures continued protection for past incidents.	It addresses gaps in coverage by providing retroactive protection for claims stemming from incidents predating the current policy. It effectively bridges the coverage lapse between policies.

Frequently Asked Questions (FAQs)

1. How long does tail coverage last?

Tail insurance coverage does not have a specific tenure as such. However, based on the requirements of the policy seekers and the options available with the insurance providers, the coverage tenure can be one year, three years, five years, or even seven years.

2. How much does tail coverage cost?

The cost of tail coverage varies depending on factors such as the insurance provider, the type of policy, the coverage limits, and the duration of the extended reporting period. Generally, such coverage premiums can be significant, often ranging from 100% to 300% of the most recent policy premium. However, some claims-made policies may offer free tail insurance under specific circumstances, such as death, disability, or retirement.

3. Do you need tail coverage for occurrence?

Whether one needs tail coverage for an occurrence-based policy depends on their specific circumstances and risk tolerance. Occurrence-based policies provide coverage for incidents that occur during the policy period, regardless of when the claim is made. Unlike claims-made policies, they do not require a tail policy to protect against claims made after the policy ends.