You’ve enjoyed a long and illustrious career, and now it’s time to move on to the next chapter in your post-business life. 

Whether you’re a small business owner or a self-employed professional heading to a golf course or a sunny destination, assuming you can cancel your insurance after shutting down your business is reasonable. For the most part, that’s likely true. However, it’s wise for some professionals and business owners to get tail coverage insurance.

What Is Tail Coverage?

Also known as run-off coverage or extended reporting period coverage, tail coverage is an extension of your insurance you can add as an endorsement or rider to cover claims made against you that were only reported after your policy expired or was cancelled.

A business owner learning about tail coverage insurance.

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It is typically used in professional liability insurance policies, such as errors and omissions (E&O) insurance or directors and officers (D&O) insurance. These policies usually operate on a claims-made basis, meaning they only cover claims that are made during the policy period or an extended reporting period. Without tail coverage, a claim made after the policy has expired would not be covered, which exposes you to significant risk.

Tail coverage is typically purchased when you retire, sell your small business, or terminate your policy. You need to ensure you’re covered for any claims arising after the policy ends. 

Tail coverage is typically only available for a limited period after the policy has expired, and the cost of tail coverage is often equivalent to a percentage of your original policy premium.

What’s the Difference Between Claims-Made and Occurrence-Based Tail Coverage?

Claims-made and occurrence-based tail coverage are two types of insurance policies that provide coverage for liability claims against a person or business. The difference between a claims-made policy and an occurrence-based policy depends on how your tail coverage is activated.

Claims-made tail coverage is a type of insurance policy that provides coverage for claims made during the policy period, even if the incident that gave rise to the claim occurred before the policy period. 

That means the policy will only cover claims made during the policy period and reported to the insurer after the policy expires. Claims-made tail coverage is typically less expensive than occurrence-based tail coverage because it’s limited to a specific period.

On the other hand, occurrence-based tail coverage provides coverage for claims that arise from incidents during the policy period, regardless of when the claim is made. 

In other words, occurrence-based tail coverage covers claims made after the policy has expired. Occurrence-based tail coverage is typically more expensive than claims-made tail coverage because it covers a broader range of claims.

What Small Businesses or Professionals Need Tail Coverage Insurance?

Tail coverage may be necessary for businesses and professionals who provide services where the risk of a claim being made against them after their policy has expired is high. Some examples of professions and businesses that may require tail coverage include:

  • Doctors, dentists, and other healthcare professionals
  • Lawyers and law firms
  • Architects and engineers
  • Accountants and financial professionals
  • Business consultants
  • Real estate agents and brokers
  • Technology consultants and IT professionals
  • Advertising and marketing professionals
  • Non-profit organizations and their directors and officers
  • Any business or professional that provides advice, expertise, or services to clients and is at risk of being sued for errors or omissions

Not all policies or professions require tail coverage. The need for tail coverage will depend on the policy’s specific terms, the nature of your profession or business, and the risk of claims being made after the policy has expired.

What Length of Time Should Tail Coverage for Insurance Last?

The time when tail coverage should be purchased can vary depending on your circumstances. However, it’s typically purchased when switching from one type of liability insurance policy to another, when you’re retiring, or leaving a profession where liability claims could arise.

Tail coverage usually lasts for a set period, such as one, two, or five years, depending on the policy. However, in some cases, you may choose to purchase an unlimited tail, which provides coverage for an indefinite period of time.

The period of tail coverage you require should be based on several factors, including the statute of limitations in your province, the likelihood of claims arising from past incidents, and the amount of coverage you need.

Purchasing too little tail coverage could expose you to expensive liability claims while purchasing too much tail coverage could result in unnecessary expenses.

Protecting Your Assets After Closing Your Business or Retiring

If you’re selling your business, closing it, or retiring, get in touch with us to find out if you should add tail coverage protection to your policy.

Let our insurance experts advise you on the potential risks you face, if you need tail coverage, the appropriate amount of coverage to buy, and for what length of time. 

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About the Author: Justin Tisdale

Justin Tisdale is a Team Lead, Professional Lines, at Zensurance.