Tail Policies 101: Key Insights for Mitigating M&A Insurance Risks

When undergoing a merger or acquisition, insurance policies might not be your top priority. However, if a claim arises after the policy period ends, you’ll want to have prepared for such scenarios. This is where Extended Reporting Periods (ERP), commonly referred to as Tail Policies, become critical.

A Tail Policy extends the time in which a claim can be reported for incidents that occurred during the policy period. This ensures coverage for claims stemming from wrongful acts (actual or alleged) that took place before the policy expired. For buyers evaluating an acquisition target, it’s essential to assess existing Tail Policies, identify covered risks, and understand the extent of available coverage.

Understanding Occurrence vs. Claims-Made Policies

Insurance policies are generally written on either an occurrence or a claims-made basis:

• Occurrence Policies: These provide coverage for incidents occurring during the policy period, regardless of when the claim is filed.
• Claims-Made Policies: These cover incidents reported during the policy period, provided they occurred after the retroactive date but before the policy’s expiration.

The distinction matters because lawsuits often arise months or even years after an incident, potentially leaving buyers exposed if the acquisition target’s coverage is claims-made.

When to Consider a Tail Policy

You should explore Tail Policies during both stock purchases and asset purchases, especially for the following scenarios:

• Dissolving a company to establish a new entity
• Ownership or control changes
• Merging the company into an existing entity

Key Coverage Lines to Evaluate

• Directors & Officers (D&O) Liability
• Employment Practices Liability (EPL)
• Cyber Liability
• Fiduciary Liability
• General Liability (GL)

In an asset purchase, even occurrence-based General Liability policies may require tail consideration through a Discontinued Products & Completed Operations policy. For example, if a product sold pre-acquisition causes harm post-acquisition, this type of policy ensures coverage.

Risk Factors to Consider

When evaluating the need for a Tail Policy, consider the following:

1. Cost: Tail policies can be costly, typically ranging from 100%-125% of the annual premium for a one-year term and 250% or more for extended periods like three or six years.
2. Past Losses: A company’s claims history affects the likelihood of obtaining a Tail Policy, favorable terms, and associated costs.
3. Exposure: High-risk industries or highly leveraged companies may face restrictive language or exclusions in Tail Policies. Conduct due diligence with an experienced broker.
4. Statutes of Limitations: Claims-made policies offer extended reporting periods (typically one, three, or six years), influenced by the statute of limitations for the type of claim.
5. Risk Tolerance: Buyers and sellers must assess their willingness to absorb risks if budget constraints or self-insurance options are considered.

What Are Naked Tail Policies?

Sometimes, entities purchase Naked Tail Policies when the dissolved or acquired company lacks prior coverage, such as D&O, Employment Practices Liability, or Cyber Insurance. These policies ensure the acquiring entity has protection for future claims tied to the acquired company.

Why Horton for Tail Policies?

At Horton, our Mergers & Acquisitions (M&A) team specializes in tailoring insurance solutions for complex deals. Whether you’re navigating risks, evaluating coverage options, or exploring Tail Policies, our experts are here to guide you.

Schedule a consultation with our M&A team and protect your acquisition with the right insurance solutions.