If you’re involved in a purchase or merger transaction, consider runoff insurance, a tail policy. This type of insurance will cover any future claims related to an act or omission before the policy’s effective date. Runoff insurance is specifically designed for claims-made insurance policies, where the coverage trigger is not the event date but the date the claim was first filed against the insured. This is especially useful for policies that cover bodily or property damage, where it may take time to apparent when the insured event occurred.
What is the typical duration for arranging tail insurance?
The tail period can last between one and seven years. During this time, the insured will be covered for any claims filed for an act or omission that happened before the start date of the runoff for up to seven years. The limitation period is typically seven years, so providing coverage for that duration is expected.
In what situations is tail insurance typically required?
When you claim your insurance, it’s essential to have an active policy. This means you must keep your coverage updated and renew it annually. However, there may be times when you can’t or don’t want to continue with ongoing coverage. In those situations, you can place a tail policy to maintain coverage even if you stop your continuous insurance.
For instance, in directors’ and officers’ liability insurance (D&O), there’s a “transaction” clause that says if there’s a change of control, the insurance becomes a runoff until the policy period ends. In such cases, sellers may want to get runoff insurance for their officers for up to seven years. This way, they can still use their insurance coverage if they get sued for previous actions or representations made during the transaction. It’s worth noting that buyers often require sellers to have runoff insurance in these types of transactions.
Another example is when a company dissolves, meaning there’s no need for ongoing coverage, but claims against its managers or employees may still come in. In this situation, it’s also in their interest to place tail insurance, not only for D&O insurance but also for professional liability insurance.
Overall, the main challenge with claim-based insurance is maintaining good coverage. Therefore, it’s crucial to understand how runoff policies work and to be prepared for significant changes during a company’s lifespan.