Beyond the Policy Period: Why Lawyers Need Tail Coverage for Long-term Security

AUGUST 19, 2024

In the legal profession, liability claims can arise after a professional liability insurance policy has ended. This can have devastating financial consequences for lawyers, whose work often involves long-lasting effects and delayed repercussions. To protect against claims, an insurance product known as “tail coverage” can be essential. This type of coverage ensures that they remain protected against potential claims related to their professional services, even after they have retired, switched firms, or ceased practicing.

Understanding and securing tail coverage is a critical component of a comprehensive risk management strategy, allowing lawyers to navigate their careers with greater peace of mind and financial security. In this guide, we will provide details on what this type of coverage is, how it benefits legal professionals, and how to determine if this type of insurance plan is right for your firm’s needs.

What is Tail Coverage?

Tail coverage for legal professionals, also known as an extended reporting period endorsement (ECRP), is a provision within a professional liability insurance policy that allows for the reporting of claims after the policy has expired or been canceled. This type of coverage is crucial for lawyers because it addresses claims made for actions that occurred during the effective period of the policy but were reported after the policy terminated.

Here’s how it typically works:

• Activation: Tail coverage is not automatically included in standard professional liability policies; it must be purchased separately, often when a lawyer retires, changes firms, or stops practicing. Most reputable Legal Malpractice carriers will offer you a free tail if you are insured with them for 3 consecutive years up until retirement.
• Duration: The coverage period can vary but often ranges from one year to unlimited duration, depending on the policy terms and the premiums paid.
• Purpose: The main purpose is to protect lawyers from claims related to their professional services that come to light after they are no longer covered by the usual professional liability insurance. This is especially important in law because the nature of legal work can lead to claims being made years after the actual service was rendered.

It is important to note that because tail coverage is a specialized form of liability insurance, the cost of tail coverage can be substantial. This came be upwards of 250% of your expiring premium.  It is critical to assess the law firm’s specific needs and risk profiles to determine if this expense is justified.

Tail coverage can be an essential tool for managing long-term liability risks in legal professions, helping to establish financial security against future claims brought by former clients, partners, or third-parties.

Why Isn’t Tail Coverage Included in Professional Liability Policies?

Tail coverage isn't automatically included in regular professional liability insurance policies for law firms primarily because of the nature of these policies and the specific needs they address.

Here are five key factors that illustrate why tail coverage is typically separate from standard policies:

Nature of Claims-Made Policies

Professional liability insurance for law firms typically operates on a claims-made basis. This means the policy only covers claims made and reported during the active policy period. Since tail coverage deals with claims reported after the policy period, it needs to be arranged as an additional, optional coverage.

Cost Considerations

Including tail coverage as a standard feature would increase the cost of the insurance premiums for all policyholders, regardless of whether they need the extended reporting period. By making it optional, insurance providers can offer more flexible and cost-effective solutions tailored to each firm's specific needs and risk exposure.

Variable Risk Profiles

Law firms have diverse practices and risk profiles. Some may need extended protection due to the nature of their work, which could involve long-term liabilities (e.g., estate planning or environmental law). Others might engage in areas with quicker resolution of cases and fewer long-term risks. Tail coverage is therefore offered as an add-on to accommodate different levels of risk and duration of exposure.

Control and Flexibility

By separating tail coverage from standard policies, law firms can have greater control over their insurance arrangements. They can choose to purchase it when facing significant changes such as retirement, cessation of practice, or firm dissolution, rather than paying for unnecessary coverage throughout their practice.

Specificity of Coverage Terms

Tail coverage terms, including duration and cost, can vary significantly based on the firm’s history, the specific area of law practiced, and the insurer’s assessment of potential risk. Keeping it separate allows for these factors to be individually assessed and tailored, providing a more precise and relevant insurance product.

What Are the Benefits of Tail Coverage for Law Firms?

Tail coverage provides several critical benefits for law firms, enhancing their risk management strategies and safeguarding the firm's financial and reputational assets. Here are some of the key advantages:

• Protection Against Late Claims: Tail coverage ensures that law firms are protected from claims made after a lawyer has left the firm or after the firm’s insurance policy has expired. This is crucial because legal claims can often be filed years after the alleged incident occurred.
• Continuity of Coverage: It provides a continuous protective net that does not leave gaps in coverage, which is particularly important during transitions, such as when a firm merges with another, dissolves, or when senior partners retire.
• Attract and Retain Talent: Offering comprehensive benefits, including tail coverage, can make a law firm more attractive to prospective employees. It also gives current lawyers peace of mind, knowing they are protected against future claims, which can improve retention.
• Enhanced Reputation: By securing tail coverage, a law firm demonstrates its commitment to ethical standards and responsibility. This proactive approach to risk management can enhance the firm's reputation among clients and within the legal community.
• Financial Stability: Tail coverage can help prevent significant financial strain from unexpected claims. Legal defense costs and potential settlements or judgments can be substantial; having insurance cover these costs helps maintain financial stability.
• Facilitates Safe Career Transitions: For law firms restructuring, merging, or seeing significant staff changes, tail coverage ensures that the legal liabilities from past actions of their attorneys do not threaten the firm’s future.
• Compliance and Client Trust: In some jurisdictions or under certain contracts, maintaining an extended reporting period might be a compliance requirement. Offering this coverage can also strengthen trust with clients, ensuring them that the firm manages all aspects of its professional responsibility seriously.

By integrating tail coverage into their insurance portfolio, law firms not only manage risks more effectively but also fortify their operational integrity and professional standing.

Assessing Needs: Is Tail Coverage Right for Your Firm?

Determining whether your law firm needs tail coverage involves evaluating several factors related to the nature of your practice, your firm's structure, and the specific risks associated with the legal services you provide. Here are some key considerations to help you decide if tail coverage is necessary for your firm:

• Nature of Legal Work: Consider the areas of law your firm practices. Areas with long-tail liabilities, such as real estate, trust and estate law, or corporate law, where issues may arise long after the completion of a case, often necessitate tail coverage.
• Changes in the Firm: If your firm is undergoing significant changes such as a merger, acquisition, downsizing, or if senior partners are retiring, tail coverage is crucial to protect against claims related to past services rendered by departing attorneys.
• Duration of Liability Exposure: Evaluate how long your firm could be potentially exposed to claims after a service is rendered. The longer the exposure, the more beneficial tail coverage becomes.
• State Bar Requirements: Check if your state bar or regulatory body has specific requirements or recommendations regarding professional liability insurance and tail coverage. Compliance with these guidelines is essential.
• Risk Management Strategy: Tail coverage should be part of a comprehensive risk management strategy. If your firm has a high-risk profile or has experienced claims that arose after the completion of legal services, tail coverage is advisable.
• Insurance Policy Terms: Review your current professional liability insurance policy to understand the terms and conditions regarding claim reporting periods. If your policy is a "claims-made" policy, it only covers claims reported during the active period unless tail coverage is in place.
• Financial Stability: Consider your firm’s financial ability to absorb legal costs from future claims without coverage. Tail coverage can be a financial safeguard that protects against potentially ruinous costs of defending against old claims, even claims that have occurred many years after legal services were rendered.
• Client Expectations and Contracts: Some clients may require your firm to maintain tail coverage as a condition of their engagement, especially in high-risk industries where lawsuits are more likely to occur after a long period.

By thoroughly assessing these factors, your firm can make an informed decision about purchasing tail coverage. In our next section, we will illustrate why insurance brokers and underwriters serve as a valuable asset when choosing tail coverage for legal professionals and their firms.