Lawsuits sometimes emerge months or years after a triggering event. A D&O tail policy provides coverage after the policy terminates.
Cover Your Tail with NSI
Not all D&O insurance policies are the same. Some business leaders think they’re protected because they have a policy in place. Then they’re hit with a lawsuit and realize they don’t have as much protection as they thought.
A D&O tail policy is a prime example. If your D&O policy does not include a tail coverage provision, or if the tail is very short, you may not have coverage for a claim that occurs after the policy has expired. NSI will work with you to secure sufficient tail coverage for your company and its executives.
Secure an Extended Reporting Period
To understand why a tail endorsement provides critical protection, it’s necessary to know a little about how D&O policies work.
D&O insurance is written on a claims-made basis. Insurance applies for covered lawsuits that occur while the policy is in force. If a lawsuit occurs after the policy has terminated, there is no coverage, even if the triggering event occurred while the policy was active.
This can lead to coverage gaps. Imagine your CEO makes a statement about your company’s future prospects in 2023. Then in 2024, the company experiences financial challenges and closes, and D&O coverage is allowed to lapse at this time. In 2025, shareholders file a lawsuit naming the CEO and accusing him of misrepresenting the company’s prospects in 2023. Even though the events in question occurred while the D&O policy was active, the lawsuit was not filed until after the policy period ended, so the CEO has no coverage.
Tail coverage addresses this issue by providing an extended reporting period. This allows for coverage for claims that emerge after the policy has lapsed.
The Advantages of Robust Tail Coverage
Robust D&O tail insurance provides peace of mind with coverage for:
- Lawsuits that emerge after the D&O policy terminates
- Litigation that happens after a company declares bankruptcy
- Executives who may be named in lawsuits
Frequently Asked Questions
Why is coverage needed if the company no longer exists?
D&O lawsuits frequently name both the company and the individual directors and officers. Even if the company no longer exists, the directors and officers can still face personal liability for their actions. For example, executives may be accused of mismanaging the company or misleading investors. The fact that the company has failed may make such accusations more likely.
Is tail coverage only useful in the event of bankruptcy?
No, tail coverage can be useful any time a claims-made policy is allowed to lapse. Although bankruptcy and the closure of a company is one common reason for this, it is not the only reason.
How long is the extended reporting period provided by tail coverage?
Tail coverage may provide an extended reporting period that’s as short as one year or as long as several years. A longer extended reporting period provides better coverage. It’s hard to say how much time will pass between an event and an associated lawsuit, but it may be multiple years. A short tail endorsement may not provide sufficient coverage, leaving executives to face lawsuits without insurance.
My company is doing well, so I’m not worried about bankruptcy. Do I need tail coverage?
It’s impossible to know what the future will bring, so tail coverage is always a smart idea. In fact, companies that are doing well may have a greater need for coverage. When expectations are high, the risk of lawsuits is significant. As the saying goes, the bigger they are, the harder they fall.
What is the retroactive date in a D&O policy?
The retroactive date bars coverage for events that took place before a certain date, even if the lawsuit occurs while the policy is in force. The retroactive date often reflects when continuous coverage was established. To ensure coverage, it’s important to secure coverage as early as possible – generally before an IPO – and to maintain coverage.
Is your company protected?
Not having adequate tail coverage is just one way companies face coverage gaps. NSI will conduct an analysis of your company’s risks and provide a D&O Risk Management Due Diligence Report. Request your report.
