E&O Tail Coverage — How Long?

When an agency is acquired by another agency, or when an agency goes out of business due to death or retirement of the agency owner, one issue that must be addressed is the “tail” (or, extended reporting coverage) on the agency’s claims-made E&O policy. Even if you don’t handle claims-made policies in your agency, you should remember from your licensing exam that claims aren’t covered once a claims-made policy is canceled or allowed to expire. This is true even if the wrongful act that causes the claim was committed while a policy was in effect. Tail coverage on a claims-made policy is designed to cover claims that are made against the agency after the policy is no longer in effect. In exchange for an additional premium payment, the insurer agrees to cover claims made in the future, for as many years as the policyholder chooses to buy. E&O policies sold by various insurers are not standard with regard to the number of years a policyholder can purchase – anywhere from one year to “forever” may be available, depending on the form. The policy sold by Westport allows up to 10 years, while most competitors offer considerably less.

When it comes time to buy tail coverage, how many years should you buy? “That’s one of the most common questions I get,” says David Surles, IIAT director of professional liability. “That’s like asking me, ‘What limit should I carry on my E&O?,’ because the only acceptable answer I can give is, ‘As much as you can afford.’” When pressed further, Surles tells the story of the longest “tail claim” he has seen at IIAT. In this case, the agent sold a disability policy to a doctor in 1970. In 1985, the doctor suffered a spine fracture in a plane crash and was totally disabled. The disability insurer paid benefits to the doctor until 1997, stopping the payments 24 months after his 65th birthday, in accordance with policy conditions. Meanwhile, the agent had sold his agency in 1992 and bought a “forever” tail from Coregis, the IIATendorsed E&O carrier prior to ERC/Westport; he then died in 1994.

In 1998, the doctor sued the insurer and the agent’s widow as executrix of the estate for breach of contract, misrepresentation, breach of the duty of good faith and fair dealing, violations of the Texas Insurance Code and violations of the Texas Deceptive Trade Practices Act. “When the widow presented the lawsuit to IIAT,” recalls Surles, “we were so pleased to find the agent’s file and discover that he had purchased tail coverage for as long as was available. We were able to tell the widow that her husband’s forethought was going to save her a lot of money, not to mention plenty of time and worry.” Coregis’ attorneys immediately petitioned the court for a summary judgment to release the estate from the lawsuit. After two years and $12,000 in expenses paid entirely by Coregis, the court threw out the case against the estate in 2000, citing the statute of limitations, the Dead Man’s Rule, no evidence that the agent violated the DTPA, and lack of privity of contract. “The agent’s E&O policy performed magnificently 28 years after the agent allegedly committed the ‘wrongful act,’” says Surles, “and four years after he passed away. That’s why I always say that purchasing tail coverage for three years or less is probably not enough. Buy as much as you can afford. By doing so, you and your family and your former employees and their families will know that you did the very best you could.” (By the way, the doctor’s case against the insurance company wasn’t settled until December 2003, when the Texas Supreme Court finally rendered judgment in favor of the company. The doctor and his attorneys received nothing, except five years’ worth of unreimbursed legal expenses.)