What Is Tail Insurance in Business?

What is tail coverage in insurance?

In business insurance, a policy can either be a claims-made policy or an occurrence policy. While occurrence-based policies automatically include coverage for a claim that occurs during the policy period — regardless of when it was filed — claims-made policies only cover a loss if both the incident and the claim occur while the policy is active. Enter tail insurance ― also called an extended reporting period ― which extends coverage on an insurance policy for an incident that occurs during the coverage period but gets reported after the policy expires or is canceled. 

Since tail insurance is an endorsement, “typically there is a charge to add this,” advised Neokissha Penix, a commercial underwriting auditor. Tail coverage is found on commercial liability insurance policies that are claims-made policies.

Keep in mind that tail coverage differs from retroactive coverage, which covers incidents that occur before the policy’s inception date. Retroactive dates extend coverage while tail coverage extends the reporting period. [Related article: What Is an Insurance Rider?]

How does tail insurance work?

Tail coverage gives you peace of mind that coverage for an incident exists after your policy is canceled or lapses. It is an important consideration when you anticipate coverage changes. Tail coverage is typical when a business closes, a service provider retires or a company moves to a new occurrence-based policy. 

Tail coverage is straightforward: it adds a reporting period to the end of your policy term. For example, assume your policy has a term date of Jan. 1, 2023, to Dec. 31, 2023, and you request to add tail coverage to this claims-made policy for six months. This coverage means that a claim can be made through June 30, 2024, for an incident during the policy term in 2023. 

Importantly, tail coverage doesn’t extend the policy period. In the above example, tail insurance won’t cover an incident that happens after Dec. 31, 2023. If an incident does occur after Dec. 31, 2023, and someone files a claim against your business, the claim will be denied and you will be responsible for any losses or damages from that claim.

Who should consider tail coverage?

Tail coverage should be obtained if you plan to retire or close your business in the foreseeable future. It’s also essential to get this endorsement if you’re switching to an occurrence-made policy.

Example 1: Business closure

An accountant is about to retire and has had a claims-made insurance policy from Jan. 1, 2003, to Dec. 31, 2023. The accountant retires and closes their practice as of Dec. 31, 2023; there will be no new potential exposure for a claim from that date. However, the accountant can still be sued for work they did in 2018 if the claim is filed in early 2024.

Without tail coverage, the accountant would be responsible for all legal and defense fees as well as any settlement or judgment resulting from the lawsuit. With tail coverage, provided the loss is reported within the extended reporting period, the policy limits will kick in and pay for the claim’s defense while handling the settlement costs up to the policy limits.

Example 2: Switching to an occurrence-made policy

When moving to an occurrence-made policy, remember that these policies pay only for incidents that happen during the policy period, even though the claim can be reported anytime thereafter. So, if your business moves from a claims-made policy that ends on Dec. 31, 2023, to an occurrence-made policy, there could be a coverage gap.

Imagine that an incident that occurred in December 2023 wasn’t reported until February 2024. The claims-made policy without tail coverage would not cover the incident because it wasn’t reported in the allowable period. The occurrence-made policy wouldn’t cover it because the incident happened before coverage for the new policy started.

How long should tail coverage last?

There may be coverage gaps if your tail coverage doesn’t extend for a long enough period. For example, assume that the tail coverage on your policy ending Dec. 21, 2023, was for six months. In this case, claims reporting could happen through June 30, 2024. However, if the insurance claims process began in July 2024, your company wouldn’t have coverage because the coverage period is over.

To avoid coverage gaps, talk to your insurance representative and legal counsel. Determine the statute of limitations in your state for filing claims. Ensure you have tail coverage that lasts as long as the statute of limitations so you don’t find yourself past the reporting date and uncovered. [If you’re looking for a new insurance representative, check out our picks for the best business insurance providers]

What insurance types offer tail coverage?

You can get coverage on certain types of liability policies. Again, tail coverage is offered in claims-made insurance policies but not on occurrence-made policies. 

These are the most common types of business insurance policies in which you can acquire tail coverage:

• Professional liability insurance, also known as errors and omissions insurance
• Directors and officers (D&O) insurance, also known as management liability insurance
• Employment practices liability insurance (EPLI)
• Cyber liability insurance 
• Data breach insurance
• Commercial crime insurance

Nathan Weller and Sean Peek contributed to this article.