In the world of commercial insurance, one term that often causes confusion among business owners is “tail coverage”, leaving you to ask, what is tail coverage?
While not every business owner may encounter it, understanding this coverage—and when it might be necessary—can make a significant difference for your company’s financial well-being.
If you’ve ever wondered what tail coverage is, why it matters, or whether your business might need it, this post will help provide those answers. We’ll break down what the coverage is, and explain how it could be essential for protecting your business when claims arise after your policy ends.
So Just What is Tail Coverage?
Tail coverage, often referred to as “extended reporting period (ERP)” coverage, is an add-on to certain insurance policies that allows you to file claims even after the original policy has expired. This means that even after your policy has expired or been canceled, you can report claims arising from incidents that occurred while the policy was active.
This type of coverage is most commonly associated with claims-made insurance policies (more on this below). For certain types of professional and business insurance, the claim must typically be filed while the policy is active to be covered. Tail coverage provides a solution to ensure you’re still protected, even after the policy term ends.
Claims-Made vs. Occurrence Policies
Before we get into how tail coverage works, it’s essential to understand the type of insurance you have, i.e., a claims-made policy or an occurrence policy:
Claims-Made Policy
A claims-made policy requires claims to be reported while the policy is active, making tail coverage a valuable addition.
Occurrence Policy
An occurrence policy, on the other hand, covers incidents that happen during the policy period, regardless of when the claim is filed. If you have an occurrence policy, tail coverage typically isn’t necessary.
How Does it Work?
Tail coverage typically isn’t a standalone insurance policy (although standalone coverage exists). Rather, most commonly it’s purchased as an add-on or endorsement to your existing claims-made insurance policy. Here’s how it works in practice:
Policy Period
Typically, the coverage must be purchased before your policy expires. It’s best to consult your insurance provider early to ensure you don’t miss the deadline.
Coverage Duration
Tail coverage can be extended for a specified period—commonly 1, 3, or 5 years. Some policies may also offer unlimited tail coverage.
Cost
The cost of tail coverage varies depending on factors like your industry, the policy’s original premium, and desired coverage duration. Expect it to cost between 100–300% of your original policy’s annual premium. While this may seem steep, it’s worth considering the potential costs of an uncovered claim.
Why is it Important?
While it’s easy to assume business risks disappear the moment your policy expires, reality says otherwise. Tail coverage is particularly crucial in these scenarios:
Business Sale or Closure
Let’s say you decide to sell or close your business after years of successful operation. A year later, a former customer files a lawsuit alleging your product caused damage or injury. Tail coverage helps ensure you’re protected, even though your business officially ceased operations months ago.
Policy Switching
If you decide to switch your coverage to a new insurance carrier, for whatever reason, there may be gaps in coverage between your old policy and your new policy. Tail coverage helps reduce the risks caused by potential gaps in coverage.
Shifting Industries
Are you planning to transition from one industry to another? Perhaps you’re a self-employed consultant, for example, who has decided to move into a corporate role, and as a result, you choose not to renew your insurance policy. Tail coverage can help safeguard you against liabilities tied to your previous line of work.
Healthcare and Legal Professionals
If you operate in high-risk industries like healthcare or law, tail coverage is often critical. Claims in these fields can arise years after the fact, and the costs of legal or medical malpractice suits are notoriously high.
How to Determine if Tail Coverage is Right for Your Business
When asking the question, what is tail coverage? it’s equally important to determine whether or not this coverage is right for your busienss. Although not every business needs the coverage, it’s essential to assess your risk.
Here are a few steps to help you make an informed decision. Remember, if you have a claims-made insurance policy for your business, you should seriouisly consider purchasing tail coverage:
Perform a Risk Assessment: Consider the likelihood of claims arising after your policy ends
Review Client or Industry Requirements: Check whether your contracts or industry regulations mandate tail coverage
Weigh Costs vs. Benefits: Compare the cost of tail coverage against the potential financial exposure of going without it
Determining whether this coverage is right for your business can be challenging without proper guidance. Be sure to consult an experienced insurance agent or broker to help you make the best decision for your specific circumstances.
Final Thoughts
Understanding tail coverage is crucial when purchasing insurance protection for your business. Specifically, this coverage is an essential consideration if your business operates under a claims-made insurance policy.
Without tail coverage, you could face significant financial and legal risks from claims that arise after your policy ends. By understanding your coverage options and working closely with your trusted insurance advisor, you can ensure your business remains protected, even when the unexpected happens.
If you’re still unsure about whether you need this coverage or how it applies to your business, contact an experienced insurance agent or broker. They can help you navigate the complexities of claims-made policies and tailor a solution that meets your unique needs.
Disclaimer: This content is for informational purposes only and should not be considered as legal or financial advice.