Tail Coverage, also known as Extended Reporting Coverage (ERP), is an important type of insurance add-on for an agency’s Errors and Omissions (E&O) policy. It’s especially useful when buying from a firm, selling or closing down an agency. Tail Insurance allows the purchaser to continue to cover E&O claims after the policy has expired. This does not extend the coverage period, but rather gives the agency more time to report an incident or claim as it arises further down the road.
How Does Tail Coverage Work?
The definition of “tail” provides a time period in which the insured retains coverage for Errors & Omissions claims resulting from professional services that were provided subsequent to the retroactive date listed in the policy and prior to the expiration date. Without this coverage, the legal defense costs and damages for professional liability claims made after the policy expires or is canceled are the responsibility of the agency owner.
Who Needs Tail Coverage?
Here is an example of a situation in which tail coverage is needed:
John, an agency owner, decides to put his agency up for sale. He finds an interested buyer, Bill, who requires a tail coverage endorsement with a length of three years minimum. John’s current policy only allows for a 12-month endorsement, so he finds he needs to locate a new carrier willing to extend the policy terms for the additional coverage. Without this amount of tail coverage, John will not be able to sell his agency.
Tail Coverage Best Practices
When purchasing or utilizing this coverage, we recommend taking these steps.
- Buyers should insist that the seller purchases coverage for a term of at least three years. Some policies can go as long as ten years.
- Sellers should purchase tail coverage with the longest term length that they can, in order to avoid being brought in to defend or settle E&O claims from past events.
- Agencies that are closing or reducing their services can also benefit from this coverage, especially in regards to claims concerning negligence. These types of claims are considered personal, so the status of your entity—whether live or dissolved—may not serve as protection for your own personal assets.
- Ensure the policy has a bilateral tail. This means that you can use this option whether you or the carrier cancels your policy for reasons other than the default. Additionally, if you retire, buy or sell an agency, or simply wind down your operation, this becomes an important policy feature.
At Axis Insurance Services, we have a solid understanding of this risk, and we have the markets to place such coverage as an MGA.
About Axis Insurance Services
At Axis Insurance Services, we aim to help our customers identify their exposures and protect themselves. Founded in 1999, we offer insurance programs to a wide variety of professionals and industries including attorneys, real estate, healthcare, architects, and more, and also have a wholesale division. We pride ourselves on offering flexible insurance coverage tailored specifically to each customer’s needs. To learn more about our solutions, contact us at (201) 847-9175 to speak with one of our professionals.
by Thomas Barrett, VP Commercial Sales
This blog was originally published on June 5, 2009. As of April 17, 2018, it has been updated.