The shortfall of claims-made policy is the limited time frame of notification within which the claim has to be reported and if the claim is not addressed during the policy term period, it will not be paid. In order to deal with this shortfall, the provision of tail coverage came into picture.
Tail coverage is an exclusive add-on cover under professional indemnity policy also known as Extended Reporting Period (EPS). It is a valuable addition to claims-made policies. It provides strong support after the termination of the policy by extending the limited time period of notification or reporting time period. In case you are planning to change your career, work location etc, tail coverage can do wonders by saving you against the incurred but not reported claims. Medical, legal or financial advice may haunt professionals if they are held liable for negligence, error, omission or breach of duty. In order to tackle such potential claims, trail coverage is a safety measure. It stays intact for your defence even after the closure of your business.
Example: A Lawyer retires in 2016 and he discontinues his professional indemnity insurance and avails a tail cover, so any claim occurred prior to 2016 and has been brought into the notice after 2016 will be covered under the provision of a tail add-on.
It is an optional endorsement availed only on claims-made policies. Policyholder of errors and omissions policy should perform the risk assessment before purchasing this add-on since the cost of obtaining this cover is quite high. It is a one-time lump sum payment, may be a fixed percentage of expiring policy’s premium. Factors affecting the amount of lump sum payment are a duration of the policy, past claim settlement, the risk profile of the policyholder etc.
The time period of the tail is an option which is spelt out in the policy. Typical options include 1, 2, 3, 5 years and unlimited time duration. Some insurance companies do not offer the unlimited time option. You generally have 30 to 60 days after expiration to purchase and pay. Once you buy, neither you nor the insurance company can cancel, also you cannot change the duration once you purchase. Since the risk of exposures increases, it ultimately increases the premium amount but it alleviates the fear of potential claims.
The insurance company is obliged to acknowledge claims which would have had to occur within the effective policy period i.e. back from the retroactive date to the expiring date of the policy. Only the notification time period will be extended, not the occurrence time period.
Suppose the inception date of a claim-based policy is 1 January 2016. The time period of policy is 1 year and the tail coverage is obtained from 2017 to 2018. Any claim occurred in the year 2017 would not be addressed. Claims occurred in 2016 but reported in 2017 will be acknowledged and passed.
An architect has professional indemnity insurance effective from 1 January 2010. He discontinued the policy in 2016. A claim has been reported in 2017 because of design defects occurred in the year 2015.
Scenario 1: He has prevailed a tail coverage for the term period of 2 years i.e. till 1 January 2018. In this case, it will be covered as the claim has been reported within the tail period. An insurance company is liable to pay the claim amount.
Scenario 2: After the policy expiration, there was no tail coverage purchased. In this case, the claim will not be covered as it has been reported after the policy expired. An architect is accountable to pay the claim amount as an insurance company is not liable to pay the claim because no tail coverage provision is applicable in this case.
Before paying the premium amount, one should always consider the possibility of potential claims, legal expenses and the financial risk. This additional coverage is a must-have add-on cover in order to make your policy fruitful for a long haul. SecureNow provides valuable help in accessing various insurers which provides the extensive benefit of professional indemnity insurance with this benefit at a reasonable cost and many value-added services. If you are going to retire or planning to change your work within next several years, do a proper planning to address potential claims in a cost-effective manner.