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Tail Coverage for Physicians: Does it pay to shop?

September 23rd, 2014 | 2 min. read

By Lindsay Youngs

What is tail coverage?

Tail coverage, also known as an extended reporting period (ERP), is additional coverage an insured can typically buy once a claims-made policy is cancelled or expires and is not renewed.  Generally provided via endorsement (ERPE), tail coverage extends a claims-made insurance policy to cover claims that occurred during the policy period, but were not reported until after the policy term.

Why is tail necessary?

Individual physicians and physician groups typically purchase tail coverage to protect their assets from claims they were unaware of at the time of policy cancellation or expiration.  In some cases tail coverage is required by the entity to which a physician was contracted to provide services, in order to limit that entity’s future exposure to claims involving that physician’s services.  Finally, individual physicians and physician groups may buy tail upon the sale of their practices either because they are selling only their assets and want to protect themselves, or because they are selling both their assets and liabilities and the buyer wants the same protection.

How much is tail?

Whatever the reason for needing tail coverage, it is expensive.  Just how expensive depends on the carrier and the product.   For standard physician risks written on admitted paper, typical ERP options cost approximately 200% – 230% of the expiring annual premium for an unlimited duration.  For non-standard physician risks placed in the surplus line market, ERP options vary depending on the duration of the reporting period.  Typical costs are 1 year for 150% of the expiring annual premium, 3 years for 200% of expiring annual premium and 5 years for 250% of the expiring annual premium.  In addition to the high cost, tail coverage is fully earned and is therefore almost impossible to finance.  This is particularly important for non-standard physician risks because surplus line carriers generally don’t provide any kind of payment plan for such extended reporting period purchases.

What can be done to mitigate the cost for this essential coverage?

Many retail agents don’t realize that there are a growing number of carriers that will write a stand-alone policy exclusively for ERP exposure.  The primary advantage of a stand-alone tail policy is they can be much less expensive than the incumbent carrier option.  We are finding that we can often times get the price down to 175% of the expiring premium, sometimes even less depending on the class and overall risk profile.

What Other Considerations Are There?

As with any change in carrier and product, you will want to:

  • Thoroughly review the policy form(s) to ensure sufficient coverage terms.
  • Carefully check any prior acts exposures to ensure no claims fall through the cracks (refer to my previous article on prior acts exposures).
  • Be sure you understand the payment terms associated with the tail options provided by the incumbent carrier and the stand-alone product(s).

Given the substantial savings stand-alone tail options may well represent for your client, it pays to shop!