Errors and Omissions: What you need to know about “Tail Coverage”

by Thomas Barrett, VP Commercial Sales

“Tail Coverage” for insurance agency E&O is simply the jargon for the Extended Reporting Coverage (ERP) feature usually found in a claims made policy.  It allows you to cover E&O risks, after the E&O policy has expired, for claims that may arise down the road.  It is not extending your policy period, but simply giving you more time to report an incident or claim to the carrier for professional services provided subsequent to the retroactive date listed in the policy and prior to the expiration date of the policy.  Many policies only give you the right to purchase such coverage in the event the insurance company cancels your policy.  Without this coverage, you are self insuring; the legal defense cost and damages are on your own dime.  Make sure that your policy has a bilateral tail; meaning that you can use this option whether you cancel or the carrier cancels your policy for reasons other than default.  If you retire, buy or sell an agency, or simply wind down your operation, this becomes an important policy feature.

Should you buy an agency from someone, you should insist that the seller buy tail coverage for at least a 3-year term; the seller typically bears that risk and cost.  If you sell your agency you should purchase tail coverage because you can still be brought into a suit about a past event.  If you wind down your operation to retire or simply dissolve the business, you should also obtain tail coverage to protect yourself from  an unexpected legal action  Suits concerning negligence are personal and having a live entity or dissolved entity may not protect your personal assets.

Here is an example of someone needing to purchase “Tail Coverage”:

An agency goes up for sale.  The purchaser of the agency requires a 3-5 year tail coverage endorsement.  The seller’s policy only allows for a 12-month endorsement.  Prior to selling his agency and his policy expiring, he finds he needs to locate a new carrier willing to extend terms for the additional coverage. This owner cannot sell his agency if he cannot find alternative coverage.

Our Firm has a solid understanding of this risk and has the markets to place such coverage.  Many agency owners are not aware that they can purchase additional coverage from an alternative carrier.  Often an alternative carrier can offer different pricing, terms and limits than the expiring carrier.  When we shop and negotiate tail coverage, we find that there are new carriers willing to quote lower premiums and differing limit options in contrast to the non-negotiable terms found in an Insured’s policy.  We have also been successful in identifying carriers willing to add tail coverage post policy expiration for Insureds who elected not to use their ERP option and later regretted that decision or for which their options have expired.  We have been approached by Insureds who purchase a 12 month tail, and when nearing expiration, decide to extend another 2-years or longer for their own peace of mind.  We have also been successful at placing this additional tail coverage with our carriers.

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