Once an individual purchases an insurance policy, they’re covered from the moment the contracts are signed until the end date. The latter is pre-determined by the insurer and policyholder or takes place if the customer terminates the agreement.
This isn’t the case with liability insurance for businesses. There’s a way for organizations to still be covered once a policy ends. It’s in the form of tail coverage.
This form of coverage is added as a rider to a claims-based policy. It handles issues related to suits when the business initially filed a claim but the second party didn’t act until after the coverage ended. In simpler terms, it’s an endorsement made by the insurer to make the necessary payments to cover damages and legal fees.
This is not a free service. Normally, the business must pay an additional fee for tail coverage. The cost will depend on the extension length and the amount of insurance requested. This can be anywhere between 100% to 300% of the customer’s final premium prior to cancelation.
Tail coverage is found in liability insurance purchased by a business. This includes policies for professional liability, directors and officers (D&O), and errors and omissions (E&O) insurance. The last covers professionals like lawyers and doctors who can be sued for the advice they provide to customers.
It is not found in insurance forms that handle occurrence-based situations. For instance, this wouldn’t be needed for an auto insurance policy. If the incident took place while the individual was insured, the firm would still handle coverage.
Despite its cost, the return on investment for tail coverage is worth it to many customers. For instance, retirees continue to have liability coverage beyond the time they leave a business or sell it to someone else. If a party switches from a claims-based to occurrence-based policy, tail coverage handles the limbo period between the two.