Maybe you’re leaving a job, you’re retiring, or you’ve just let your insurance coverage expire. If there’s any kind of change in your professional liability insurance, you’ll want to know all about tail coverage protection. Why would you need it? When should you buy it? How much does it cost? We answer all these questions and more below.
What Is Tail Coverage? Why Would You Need It?
Think of tail coverage as a liability insurance extension plan. Also referred to as an “extended reporting period,” tail coverage is an additional feature you might buy after canceling an existing policy or letting one lapse. With tail coverage, you’re still insured if a claim is filed against you after the policy ends. Tail coverage can be purchased as a supplement to an existing policy, or it can be purchased separately as your only form of liability insurance — like if you retire.
Claims-Made vs. Occurrence Policies
Most professional liability insurance policies are sold on a "claims-made" basis, which means they only cover claims that are made against you, the policyholder, while those policies are active. This is a particularly popular option for those who provide professional services and/or advice to clients (e.g., real estate brokers and insurance agents) and need to buy errors and omissions insurance. If you have a claims-made policy, tail coverage may be what you need to make sure you can still report that claim and get coverage.
An “occurrence” policy, on the other hand, focuses on when the incident that ends in a claim actually occurs, regardless of when the claim is filed. Occurrence policies are very common among healthcare professionals who buy malpractice insurance. Typically, if you have an occurrence policy, you would not need tail coverage. However, you should always double-check the language on your insurance documents. Your policy should state clearly on the Declarations Page what kind of coverage you have.
(Want to learn more about these two types of policies? Make sure to check out our article, "Claims-Made vs. Occurrence Policies: What's the Difference?")
Sample Tail Coverage Scenario
Let’s say you have a claims-made policy that expires at the end of the year. Mr. Client sues you regarding services you performed for him this year. Your current policy applies to that claim but only if he sues you when the policy is still active.
But what happens if Mr. Client doesn’t sue you until next year, after your policy expires? Here are some things to keep in mind:
- If you keep the same insurance carrier and renew your policy for another year, you don’t need to worry. The new policy should cover any claims made in the new year, including Mr. Client’s lawsuit.
- If you switch carriers on a claims-made basis, you also don’t need to worry because that new policy should also respond to Mr. Client’s claim. Just make sure the new carrier agrees to cover claims arising from your past work that you didn’t know about or expect. This is usually not a problem if you don’t have any lapses in coverage.
- However, if you don’t continue your claims-made coverage and let it expire, you wouldn’t have an active policy to cover Mr. Client’s claim. You’d be on the hook to pay your legal fees and any damages or settlement costs.
When Do You Need to Buy Tail Coverage?
You might be asking why you’d ever decide not to continue your claims-made coverage. The truth is, there are a lot of reasons why your coverage might be interrupted, creating a possible gap in coverage for those late-breaking claims.
Here are just a few examples of circumstances that could lead to a gap in coverage:
- Employer change, like if your new employer adds you to their own policy and you decide to cancel your current coverage
- Retirement or a leave of absence from your profession
- Switching carriers and buying an occurrence-based policy instead of a new claims-made policy. The new policy will only cover claims if the incident happens during the new policy term.
- Switching carriers and buying another claims-made policy, but the new carrier will not recognize claims based on your prior work
- Change in profession
- Current carrier cancels or non-renews your policy. If this happens, you should always contact your carrier to ask about tail coverage.
How Does Tail Coverage Differ From 'Nose' Coverage?
Nose and tail coverage serve the same purpose. It’s simply a difference in which carrier you buy the coverage from: the one you’re leaving (tail) or the new one (nose).
Here’s the breakdown:
- Tail coverage protects you against claims made after your old policy ends. You typically buy this from your expiring policy’s insurance company.
- Nose coverage covers you for alleged incidents that took place before your new policy goes into effect. You will need to get this from your new carrier. For the most part, your new carrier will be willing to include this “retroactive” coverage if you don’t have any lapse in coverage or major changes in exposure. But there may also be a charge associated, depending on how many years of prior acts you are asking the new carrier to cover.
Typically, people buy either tail coverage or nose coverage. But in cases where there’s a long, anticipated break between insurance plans, some people purchase both to make sure they’re covered.
How Much Does Tail Coverage Cost? How Do You Buy It?
First, you want to make sure that you're eligible to buy tail coverage. You may not be eligible if you were canceled for not paying your premium. And, make sure you comply with any time limits for choosing the tail coverage and paying for it. If you wait too long, you may lose out on the opportunity to secure this protection.
The cost of tail coverage is often a multiple of your current annual policy premium, depending on how long you want it to extend. This price is set when your current policy was issued and should be found in the policy itself, often on the Declarations page. For certain professions and industries (e.g., healthcare), the cost of tail coverage is waived if you retire, die, or become disabled and unable to practice medicine.
You usually have about 30 days after the end of your current policy to notify your carrier that you would like to buy the tail and what length of tail you want.
Once you decide to purchase a tail, you’ll need to pay the corresponding premium charge based on how long you want the tail to last. The most common tail options are for one, three, or five years. However, if you’re a healthcare professional, most carriers offer an unlimited tail given the potential delay in medical malpractice lawsuits.
Be aware that the timeframe allowed for bringing a lawsuit can vary quite a bit from state to state, and medical malpractice lawsuits can be filed even decades after your services are performed. Evaluate the likelihood of a long delay between your services and a potential lawsuit, based on the type of work you do and the laws in your state.
If you don’t want to buy tail coverage from your current carrier, you can always consider purchasing stand-alone tail coverage. This is basically a new policy from a different carrier that only covers you for future claims based on alleged incidents occurring before the tail policy starts.
Dispelling the 3 Most Commmon Myths About Tail Coverage
Many professionals have more important things to do than to comb through the nuances of professional liability insurance coverage. It’s often complicated, so it’s no surprise that misunderstandings happen. To clear things up, here are a few common misconceptions about tail coverage for professional liability insurance.
Myth #1: Tail coverage is automatically available in your insurance plan.
Not necessarily. Your contract might include tail coverage as an option. But if, for example, you’re covered under your employer’s policy, tail coverage might not be available to you individually (or you might not need it). Before changing employers, look over your current policy to see if tail is an option.
Myth #2: Tail coverage gives you more limits of liability.
Nope. In almost all states, if you buy an extended reporting period from your current carrier, you will only have access to the remaining policy limits of liability for the duration of the tail. The additional premium you pay buys you more time for reporting claims, but not more limits.
Myth #3: Tail coverage isn’t necessary once you’re retired.
Lawsuits can crop up years after an incident happens. In some states, medical malpractice or negligence claims can be made years — sometimes even decades — after an incident occurs. In fact, people can still be named in a claim or lawsuit, even if they’re no longer working in that field.
If you decide to change your current insurance, you’ll need to explore your tail coverage options. Your previous insurance policy may have tail, or your new employer’s policy might have nose. Just make sure the work at your previous employer stays insured. And if nothing else, consider a separate policy that always insures you and only you.
Whatever you decide, you will want to make sure that you don’t end up starting a new phase of your life suddenly handling a claim for an incident that took place in the past and be forced to pay out of pocket.