Suppose you plan on selling, buying, or closing down your business. In that case, it’s critical to understand the importance of having a tail insurance policy to ensure adequate protection after a sales transaction.
But what is tail insurance, and what critical role does it play in selling a business?
Understanding How Tail Insurance Works
Most professional liability policies, such as E&O, D&O, EPL, and Cyber insurance, operate on a claims-made basis. This means coverage is triggered when a claim is made against the insured during the policy period, regardless of when the claim occurred. This contrasts with occurrence-based policies, which cover incidents that occur only during the policy period.
Simply put, tail insurance coverage (also known as an extended reporting period endorsement) protects a business when a claim is made after a claims-made professional liability policy has expired, is canceled, or has been terminated.
This extended reporting time gives a business more time to file a claim for incidents that occurred during the policy period but were reported after the policy expired or was canceled. This allows the insured to remain protected against potential liabilities—even after the termination of their professional liability policy. This coverage is critical when selling a business.
Here’s an example: Let’s say you own a technology firm with a Tech E&O/Cyber policy that has been in force for several years, protecting you from claims made against your business. However, once your business is sold or closed, you terminate your E&O policy. But what about claims related to incidents that occurred during the policy period but weren’t yet reported, such as a client that files a claim after the sale? With a tail insurance policy, you can file a claim and remain protected even after the policy has expired.
Protection For the Seller and Buyer
When a business is sold, tail coverage provides the seller with protection against claim-related incidents after the transaction has been concluded. This extended reporting time also safeguards the buyer by ensuring a claim can be made after the sales have closed.
Buyers and sellers often address tail coverage during negotiations for a business transaction to ensure comprehensive coverage. In most cases, you can expect the buyer to require tail coverage. For many transactions, five years of tail coverage is the norm. Even if the buyer does not require tail coverage, sellers should have tail coverage to ensure they are personally protected.
Tail insurance can be purchased separately as a stand-alone policy or as an added endorsement in your E&O policy. However, the process for securing tail insurance can be complex. When considering a policy, one should consult an expert to ensure appropriate coverage and the best terms.
Here are some important considerations regarding E&O insurance and tail coverage:
- Be aware – there is often a lack of consistency among E&O carriers regarding extended reporting period options and the specific process that should be followed
- Ensure that your E&O, D&O, or other claims-made policy is properly endorsed to provide coverage after the sale for a reasonable time period
- Understand that E&O, D&O, and other claims-made policies are generally not assignable – you cannot transfer the policy from one entity (such as a seller) to another (such as a buyer) during a business asset sale)
Tail insurance plays a critical role in the sale of a business. By extending protection beyond the expiration of an E&O policy, buyers and sellers can address potential claims related to prior incidents, ensuring business continuity and peace of mind.
About eSpecialty Insurance and Bob Sargent, Founder & CEO
eSpecialty Insurance was established to revolutionize the customer journey in specialty insurance. Bob is a founder and early-stage investor with decades of experience as an underwriter and broker addressing unusual, complex, and challenging exposures. He helps businesses to secure the most comprehensive insurance solutions at competitive rates.
Email [email protected] or call (435) 252-1077 to learn more.