If you have a claims-made insurance policy, your insurer may have offered you tail insurance. But what is tail insurance? Although it may seem confusing, it’s an important provision in claims-made policies.
Claims-Made Policy vs. Occurrence Policy
To understand why tail insurance is important, you first need to understand how liability coverage works in claims-made and occurrence policies.
According to Investopedia, an occurrence policy covers claims for incidents that occur during the life of the insurance policy. This means a policyholder can request compensation for an incident that occurred while the policy was active, even if the policy is no longer active when the person makes the claim.
Claims-made policies work differently. According to Investopedia, a claims-made policy provides coverage for claims made while the policy is active, regardless of when the incident occurred. The retroactive date will determine how far back coverage goes. Incidents that happened before the retroactive date will not have coverage.
This distinction can be critical when there is a significant gap between an incident and a claim related to that incident. For example, imagine a situation involving a surgeon with a medical malpractice liability insurance policy. During an operation in 2019, the surgeon makes a mistake that will require additional surgeries later and cause pain and suffering for the patient. Since the mistake is not immediately apparent, neither the surgeon nor the patient realizes there is a problem until 2021, when the patient seeks medical care from another provider. At this point, the patient sues the surgeon. However, the surgeon retired in 2020 and terminated the medical malpractice liability insurance policy at that time.
In this situation, there is a gap of two years between when the incident occurred and when the patient filed a claim. If the surgeon had maintained the same insurance coverage throughout this period, the timeline may not have been an issue, but since the medical malpractice liability insurance coverage was terminated before the patient filed a claim, the situation becomes more complicated. If the policy operated on an occurrence basis, coverage should be available because the incident occurred when the policy was in force. However, if the policy operated on a claims-made basis, coverage may not be available because the claim was filed when the policy was no longer in force.
As many policies operate on a claims-made basis, this is a common issue.
How Tail Coverage Provides Protection
According to IRMI, tail coverage is a provision in some claims-made policies that allows the policyholder to report a claim made against the policyholder after the policy has been canceled or allowed to expire. The incident leading to the claim must have taken place while the policy was active.
Extended Reporting Period
Another term for tail coverage is extending reporting period. If you add this provision to a claims-made policy, claims can be filed after your policy has ended if the incident that led to the claim occurred while your policy was in force.
Should you buy tail coverage?
Since tail coverage provides important protection, purchasing it may seem like a no-brainer. However, adding this endorsement to your policy will increase the cost of your policy. For this reason, you may wonder if a tail insurance policy is worth the expense.
To determine whether you could benefit from tail coverage, ask yourself the following questions:
- Do you have a claims-made policy? If your policy works on an occurrence basis, you do not need a tail coverage endorsement. However, if you are buying a claims-made policy, a tail coverage endorsement offers important protection. Review the policy terms and talk to your broker to learn more about your extended reporting period options.
- Is a gap between incidents and claims possible in your industry? You should always notify your insurance company of any claim promptly, but you can’t notify your insurance company of a claim if you don’t know about it yet. Months, or even years, can pass between an incident and a lawsuit or claim. This type of gap is common with medical malpractice claims, but it can also happen in situations covered by other types of policies, such as professional liability, employment practices liability, and directors and officers liability insurance. If you might not learn about claims immediately, you may benefit from tail coverage.
- How would you handle a lawsuit without insurance coverage? Imagine you purchase a claims-made insurance policy without an extended reporting period endorsement. Years later, you receive the news you’re being sued for an incident that happened a long time ago, but you don’t have insurance coverage anymore. How will you pay for the defense costs and any settlements or jury awards? How will the lawsuit impact your personal finances and retirement plans?
Switching Insurance Carriers
You might decide to switch liability insurance companies for any number of reasons. For example, your current insurance company could raise your premium, leading you to switch to a provider that can offer you a better rate. You might also decide to switch insurance companies if you find a company that offers more robust coverage or better risk management services. You could also decide to transition to a captive or self-insured arrangement.
If and when you make changes to your coverage, it’s important to watch out for coverage gaps that could leave you exposed to lawsuits. Here are two examples:
- Changing policy types: Let’s say you’re switching from a claims-made policy to an occurrence policy. As the claims-made policy doesn’t have tail coverage, it won’t cover you for claims made after the policy expires. The occurrence policy won’t cover you for incidents that occurred before the policy went into effect. In this situation, you might not have coverage for an incident that occurred during the life of your first policy but is reported during the life of your second policy, even if you have continuous coverage with no gaps between your policies. You can resolve this problem with tail coverage.
- Changing policy terms: Coverage gaps can also occur when switching from one claims-made policy to another if the retroactive dates and extending reporting periods don’t line up. A claims-made policy won’t provide coverage for claims made before your retroactive date. The retroactive date often will occur before your policy’s effective date, provided you’ve had continuous coverage, but you’ll need to verify prior acts coverage.
Protecting Your Future with Tail Insurance
As you can see, there are lot of details involved with your purchase of commercial insurance. That’s why it’s essential to partner with an experienced, independent broker who can help you understand coverage terms, compare the options available and avoid costly gaps in coverage.
If you have a claims-made insurance policy, tail insurance can protect you against lawsuits that occur after your coverage ends. This is especially important when you switch insurance companies or retire.
Higginbotham can help you secure the insurance coverage you need to protect yourself now and in the future. Learn more about our custom business insurance packages.