Tail coverage insurance helps protect your business if a claim gets reported after your policy ends. This article explains what tail coverage is, how it works, who it’s for, its benefits, how much it costs, and the alternative to tail coverage.
What Is Tail Coverage?
Many small businesses want to know: “What is tail insurance, and do I need it?”
Tail coverage (also known as extended reporting period) is an optional coverage that a business owner can add to their policy to help protect them if a claim gets reported after their policy ends.
Tail coverage is essential because it extends the time your insurance will pay for claims after certain policies end.
How Does Tail Coverage Work?
So, what is tail coverage all about? Tail coverage applies to claims-made policies (insurance that only covers claims reported while the policy is active). The way tail policy insurance works is you purchase it after you cancel your policy or if your provider decides not to renew your insurance. That way, you are covered if a claim gets reported after your policy expires.
Many claims-made policies have retroactive dates. A retroactive date is an exclusion, meaning coverage won’t apply to any events that occurred before the retroactive date, even if a claim gets reported during the policy’s effective dates. The retroactive date is usually the date the policy begins.
If your policy has a retroactive date, tail coverage will not cover any events that happen before the retroactive date. Claims that get reported after your tail coverage ends are also not covered.
Some states have laws concerning tail coverage, meaning that your policy might include a tail period.
But how long do you need tail coverage? Some policies include a short tail period (30-90 days). Many businesses may want a longer tail period for more protection. Companies can purchase tail coverage for up to a year or more after their policy ends. Some insurers even provide unlimited tail coverage.
Typically, the longer the tail coverage period, the better, as it ensures that you are covered should a delayed claim be reported.
What Are the Benefits of Tail Coverage?
The benefit of tail coverage for a business is that it keeps you from paying out of pocket to defend against liability claims made after your policy ends. Legal fees for defending lawsuits can be costly and might even bankrupt your business.
How Much Does Tail Coverage Cost?
So, how much is tail coverage? Tail coverage cost depends on your specific business and coverage needs. Factors affecting tail insurance cost include the type of policy you need tail coverage for and your unique business risks.
Some of the factors affecting tail coverage cost include your business’s:
- Location
- Number of employees
- Claims history
- Policy coverage limits
- Industry
The cost of tail coverage tends to increase with the length of time of the coverage.
You might ask, “Who pays for tail coverage?” The business named in the policy typically pays for tail coverage.
You can use a tail coverage calculator to help determine the cost of tail coverage. A tail coverage calculator multiplies the amount of your expiring annual premium by two. For example, if you have a data breach policy that costs $1,000 a year, the cost of tail coverage would likely be $2,000. However, insurers can charge anywhere from 100%-300% of the cost of your annual premium.
Why Do I Need Tail Coverage?
If you’ve gotten this far, you may find yourself wondering: “Do I need tail coverage?” The answer depends on your unique situation. Let’s take a look at a few circumstances in which you might need tail coverage for your business.
If You Have Claims-Made Insurance Policies
Insurance policies typically fall into two categories: claims-made and occurrence-based.
A claims-made policy typically only pays out for covered events and the injuries or damages they cause if the event and the resulting damage happen and the claim gets reported while your policy is in place.
For instance, let’s say you’re a financial advisor who gives a client bad investment advice that causes the client to lose money. The client sues you for providing inaccurate information, but your claims-made professional liability policy has expired at the time of the claim. That means you would have to pay legal defense fees (and settlement fees if you are found at fault) on your own.
With an occurrence policy, it doesn’t matter when a claim gets reported, as long as the covered event happens while the policy is active.
For example, let’s say someone slips and falls and injures themself at your business, but they don’t file a claim against you for several months. If you have an occurrence-based general liability policy, it can cover the claim even if your policy expires by the time the claim gets reported.
With claims-made insurance policies, tail coverage can cover claims as long as they get reported during the extended reporting period.
If You’re Changing Insurers
If you choose to cancel your insurance and switch providers or your provider decides not to renew your policy, you might want to add on tail coverage. Tail coverage can protect you if there is a gap period between policy effective dates. If you switch from claims-made to occurrence-based insurance, tail coverage can protect you from events that may have occurred under your claims-made policy.
If You’re Retiring or Closing Your Business
It’s a good idea to purchase tail coverage if you are retiring or shutting down your business, as it can ensure protection after your insurance ends.
Which Businesses Should Get Tail Coverage?
Businesses with the following claims-made policies may want to get tail coverage:
Professional liability: (also known as errors and omission insurance) protects against negligence claims and accusations that you provided inaccurate information
Employment practices liability: protects against employee claims of harassment or discrimination
Cyber liability: helps pay for damages arising from data breaches or cyberattacks
Businesses that offer professional services should consider getting tail coverage, including:
- Accountants
- Financial advisors
- Lawyers
- Architects
- Engineers
- Insurance agents
- Healthcare workers
- Consultants
- Real estate agents
What’s the Alternative to Tail Coverage?
One alternative to tail coverage is nose coverage. Nose coverage covers events that occur before your policy start date. If you’re switching providers, you may consider asking your new provider if you can purchase nose coverage from it, instead of buying tail coverage from your old provider.
