Understanding Insurance Policies: Claims-Made vs. Occurrence Policies and Tail Coverage

Insurance can be a lifesaver for businesses, protecting them from potential financial disasters. Two common types of insurance policies are claims-made and occurrence policies, each with its own quirks. In this blog post, we’ll break down these insurance policies, shed light on tail coverage, and help you make informed choices for your business.

Claims-Made vs. Occurrence Policies: What’s the Difference?

Imagine you’re running a business, and someone files a claim against you. Claims-made and occurrence policies offer protection, but they work differently.

• Claims-Made Policy:
  • Covers claims made during the policy period.
  • Won’t cover claims made after the policy expires.
  • Requires additional “tail coverage” to extend protection beyond the policy period.
• Occurrence Policy:
  • Covers claims arising from incidents during the policy period.
  • Covers claims made even after the policy expires.
  • No need for tail coverage since it already offers post-expiration coverage.

So, claims-made policies require an extra step (tail coverage) to provide the same level of protection as occurrence policies.

When Do You Need Tail Coverage?

Tail coverage, also known as extended reporting period (ERP) coverage, is crucial for professionals, especially in the medical field. Here’s when you should consider it:

• Transitioning Between Policies:
  • When shifting from one professional liability policy to another.
  • Ensures coverage for services provided during the previous policy.
• Retirement or Career Changes:
  • When retiring, changing jobs, or leaving your current practice.
  • Offers protection for potential claims related to past services.

In some cases, the law or insurers may require tail coverage, making it a must-have.

Choosing the Right Tail Coverage

Selecting the appropriate tail coverage for your business is vital. Here’s how:

• Consider Scope:
  • Evaluate the level of protection you need based on your business’s unique risks.
  • Tailor the coverage to your specific requirements.
• Compare Costs:
  • Tail coverage can be pricey, so shop around.
  • Get quotes from multiple providers to find the best value.
• Read the Fine Print:
  • Examine policy exclusions and limitations carefully.
  • Ensure the coverage aligns with your needs.

By following these steps, you’ll ensure your business is shielded from potential post-expiration claims.

The Costs of Tail Coverage

Tail coverage costs vary depending on several factors, such as the scope of your practice, coverage duration, and policy type. Generally:

• Time Since Policy Expiration:
  • Longer gaps between policies result in higher tail coverage costs.
• Policy Type:
  • Different policies offer different levels of coverage, affecting the cost.

Tail coverage is typically paid as a lump sum, so factor in this expense when planning your insurance budget.

Common Misconceptions About Tail Coverage

Let’s clear up some misconceptions about tail coverage:

1. Only for Canceled Policies:
   • Tail coverage is needed for renewed policies too, ensuring protection for past incidents.
2. Expensive:
   • While it has a cost, it’s often cheaper than potential litigation expenses.
3. Limited to Certain Policies:
   • Tail coverage applies to various insurance types, not just one.
4. Requires Prior Claims:
   • It’s necessary even if no prior claims have been made.
5. Only for Long-Term Policies:
   • Tail coverage is essential for both short and long-term policies.

Exploring the Pros and Cons of Tail Coverage

Let’s weigh the pros and cons of tail coverage:

Pros:

• Post-Expiration Protection:
  • Covers claims made after policy expiration, providing peace of mind.
• Reputation Protection:
  • Ensures proper handling of post-expiration claims, safeguarding your reputation.

Cons:

• Costly:
  • Tail coverage can be expensive, especially for longer durations.
• Limited to Past Claims:
  • Doesn’t cover new claims after policy expiration.

In conclusion, tail coverage is a valuable insurance option, especially if you’re insured under a claims-made policy. However, consider the costs and limitations before making your decision. With the right choice, you’ll ensure your business is shielded from potential financial disasters, even after your policy has expired.