Thursday, May 27, 2010

What is Tail coverage?

In the world of D&O, E&O and other types of Claims-Made policies, "Tail coverage" or an Extended Reporting Period is an extended window of time in which a policyholder can report a claim.

Professional and Management liability claims have long "tails" on them. A wrong can occur in 2008 and not be realized until 2009. Once a claim is filed for that wrong, which policy responds: 2008 or 2009?

Claims-made policies state that the policy in effect when the CLAIM is MADE will be the policy to respond. As such, if the policy doesn't renew, then the coverage window ceases.

In the above example, a wrong occurred in 2008 and was discovered in 2009. If the insured chose not to renew their 2009 policy, then he or she would not have a policy to cover that claim - even though the wrong occurred in 2008, when they did have a policy in effect. Get it?

When a Claims-Made policy cancels or is not renewed, the policyholder has the option to purchase an Extended Reporting Period (ERP or Tail), which will extend that window allowing him/her to report claims resulting from activities when the coverage was in force.  Any agent worth his or her salt should recommend an ERP to clients once a Claims-Made policy ends.

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