For companies that create solutions, introduce recommendations, or represent other individuals, high-quality services and error-free work is expected on every occurrence. However, mistakes are bound to happen eventually. The smallest errors can result in the biggest consequences. Lawsuits, restitution costs, and major claims are just a few possible expenses of errors and omissions in any industry. These consequences can affect your business financials detrimentally if you are not properly insured with a Professional Liability policy, like Errors & Omissions.
Why do businesses need Professional Liability Coverage? – For mistakes made by a company that go unnoticed and need fixing or impact other people, this coverage is needed. If you are found at fault, this policy can cover the cost of defense in court or financial damages that are awarded to the claimant.
Companies that need professional liability insurance typically consist of professional service providers that formulate answers to problems, give advice, or act on behalf of others:
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Lawyers
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Doctors
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Dentists
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Accountants
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Healthcare providers
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Engineers & Architects
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Information technology consultants
Let’s say an architect works on a project where they must design blueprints for a building. They finish designing the blueprints and the building gets built, but later, the owner realizes that there is a problem with the structure of the building. Although the project is finished and the structuring/building process already occurred, the architects, who are no longer in business, are found at fault because of an error or omission for which they were responsible. With tail coverage, the architects could be covered from claims made towards them after their original claims-made policy had expired, even though they worked on the project previously and it was already complete.
What is tail coverage and how long should it last? – An ERP (extended reporting period) or “Tail” coverage, protects your business from claims reported after your claims-made insurance policy expires. Tail coverage term lengths can vary from 1 year to an unlimited term, depending on the policy. The Extended reporting period or tail, is triggered by claims or lawsuits that are filed against your business during the tail period, for work that was performed prior to the policy termination. For instance, if your policy expires or terminates 7/1/24, and you receive a lawsuit or claim after 7/1/24 for work performed prior to that policy termination, you would need the tail so the claim is covered. The longer your tail coverage is, the longer your business is protected from claims. A general rule of thumb for tail coverage is to set the term length to fully cover the statute of limitation period. Coverage past the statute of limitation period will depend on the profession you are in because of different risk exposures.
How much does tail coverage cost? – Tail coverage is typically a % of the most recent annual policy premium. Usually, it is scaled based on the term or length of the tail: for example, 100% for 1 year, 150% for 2 years, 200% for 3 years. It may be perceived as being expensive, but consider how long it could potentially protect you. The cost is also driven by the uncertainty and risk of the time duration. The claims that are covered by tail coverage could be more severe because of how long it might take for the damage to build up. The claim might have gone unnoticed for a long time which leads to a more severe claim and a higher cost.
In summary, companies that require Professional Liability coverage, particularly errors and omissions, should be cognizant of the need for tail coverage when the policy is eventually cancelled or expired, whether the business closes, is sold, or for some other reason. They should decide the length required for the tail coverage based on their own industry norms and practices, including any statute of limitation for the profession. Finally, they should weigh the cost of the tail coverage versus the needed duration. If the cost is too prohibitive, businesses can assume some risk by shortening the tail duration.
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About Tim Flanagan:
Tim Flanagan is a sales intern with Rue Insurance in Hamilton, New Jersey. He is a senior at Stevenson University in Owings Mills, Maryland. He is majoring in marketing with a minor in entrepreneurship and small business development. As an intern, Tim is gaining valuable experience and knowledge in the insurance industry.
About Bob Cottone:
Bob Cottone joined Rue Insurance in 2000, bringing 15 years of experience including commercial underwriting, independent consulting, and success as a partner with private and public brokers. He is dedicated to designing and implementing cost effective risk management programs for clients, particularly those in Healthcare, Technology, and Human Service Organizations. He holds the Accredited Advisor in Insurance designation (AAI), and is licensed in multiple states. Bob focuses on specialties in Professional Liability, Privacy/Data Breach/Cyber Liability, and Directors & Officers Liability. He has authored articles and presented a variety of workshops and seminars in his area of expertise, and is also very experienced with implementing and facilitating Safety Committees for larger organizations.
